The good news is 401(k) plans are tax-advantaged, defined-contribution retirement accounts that employers can offer to their people as a benefit — and they become even more valuable when the employers offer to match employee contributions. The bad news is the vast majority of small businesses cannot afford the cost and human resource time involved. What’s more, it represented a lost opportunity for RIAs and their advisers.
But technology has begun to assert itself in the 401(k) space, and that is broadening the playing field for RIAs and employers. Dan Beck, co-founder and CEO of 401GO is on the front lines of this movement.
What have been the limitations for small employers looking to access 401(k) plans?
The complexity, costs, and time and energy required to set up and administer a 401(k) plan are the biggest challenges. The IRS and DOL have a lot of rules and regulations regarding how a plan is set up and administered, which isn’t much of a challenge for a larger company with a dedicated HR team, but for smaller businesses there hasn’t been an effective way to deal with all the rules and regulations. In setting up a 401(k), a company will usually have to coordinate with a third-party administrator, recordkeeper, a financial adviser and a custodian.
How has technology changed that?
In the same way that investing, banking and HR platforms have leveraged technology to streamline, automate and reduce costs, there are several 401(k) providers that are doing the same. The digital-first 401(k) solutions have modernized everything from plan setup to the ongoing administration which, when integrated with a payroll system, enables the 401(k) to be set up and administered with very little work. The same time-saving automation also reduces costs by bundling together what would normally be accomplished by three or four service providers.
How widespread is participation of 401(k) fund providers?
Fewer than 15 percent of existing small businesses offer a 401(k), which makes the remaining 85 percent a blue ocean opportunity for anyone in the industry. While the fund providers benefit from a larger overall market share, 401(k) service providers (third-party administrators, recordkeepers, advisers) are struggling to keep up with digital-first solutions. While the industry has made incredible strides in using technology to automate many processes, it’s often too difficult for these more established service providers to identify processes that can be replaced or completely eliminated. They have the difficult task of the continued use of older legacy systems by some clients while trying to simultaneously bring on modernized solutions.
What does this mean for RIAs and their financial advisers?
There is fierce competition in the existing 401(k) market as advisers fight to protect their territory against other advisers and emerging robo-advisers that threaten RIAs. Many of the digital-first solutions have the mindset that anything a human can do a computer/algorithm can do better. Advisers can sense this and oftentimes see tech as a threat to their livelihood. This growing divide is an ever-increasing challenge to RIAs and their advisers. Their clients are demanding tech-based solutions that reduce cost and complexity, and advisers are having a hard time finding a solution that will work alongside them and not against them.
Many of the national RIAs have staked their claim by finding a more technology savvy solution and partnering to provide their advisers with a viable solution, but smaller RIAs are left with few options. Additionally, the solutions that RIAs are developing are often only slightly more automated versions of existing solutions that still have a hard time reaching that micro-market business that needs a 401(k). It’s imperative that RIAs and their advisers find a true digital-first fintech solution that is willing to partner with the industry rather than advocate against it.
What does the future hold in terms of tech innovations or broader arrays of investment options?
On the investment side of the 401(k), the ever-changing horizon of the market and investment options make for a fuzzy picture of what the future holds. This is just another challenge that advisers face. Many of the tried-and-true value investor principles seem to have lost relevance or favor in the current market where SPACs, cryptocurrency and a market obsessed with growth above all else seems to be what investors are looking for.
While the future may be murky and hard to predict, there is still much to be excited about. Private equity is within reach of more investors. Cryptocurrency seems to be increasing in relevance, and the growing DeFi (decentralized finance) movement holds promise for those brave and curious enough to learn about it. The pace of tech change is increasing, but advisers will always be in demand as long as they can keep up with change.