The established providers and distributors of defined contribution plans have been protected from most outsiders by complicated and burdensome laws and regulations, clunky technology and complex distribution networks as well as declining fees requiring massive scale. So while record keepers, retirement plan advisors and even, to a certain extent third party administrators, are consolidating at a rapid pace with few new entrants over the past decade, that all will change leaving some established DC providers and distributors wondering what happened after it is too late.
Why is this all happening now? The prize is the 70+ million DC participants without access to a traditional advisor. The obstacles include how to provide meaningful advice at scale, arcane record keeping systems built in the 1990s limiting integration of new technology and the lack of rich, meaningful data. Even though just a few of the current record keepers and larger RPA firms have shown the ability to leverage participants profitably, private equity firms keep pouring in money raising valuations of an industry that has fees racing to the bottom and eventually going to zero.
PE firms do not hit on all their investments, but as a group, they are rarely wrong about an industry or market. Even if the record keepers or advisors they have invested in do not reach the final goal, those that do will buy them for scale. It is almost a no-lose situation.
The workplace will be the No. 1 source of assets for advisors in the next decades, according to Morgan Stanley CEO James Gorman, and that will only grow with the explosion of small plans driven by government mandates, SECURE 2.0 and group plans like PEPs. Though participant growth will be slower because new plans will be smaller, they present opportunities for advisors to work with budding businesses and their owners and managers offering a panoply of wealth, corporate and eventually benefits services.
The immovable obstacles are no match for the irresistible forces upending the current business model of many current providers and RPAs opening the door for new entrants who are more adept at technology, use of data and AI, and wealth services.
The entrants in the convergence race include:
- Record keepers
- RPAs
- Wealth advisors
Asset managers with a DCIO presence and understanding of the food chain are and will be the arms manufacturers.
Record keepers are currently in the pole position as minders of the data, brand recognition with participants as well as massive staffs and access to capital. But most are limited by their underlying old technology, inability to provide wealth services and the reluctance and at times outright unwillingness to adopt new business models like PEPs.
Many RPAs, especially aggregators and larger regional firms, have access to tens of thousands and even millions of participants, the trust of the employer that gives them credibility with employees, and because they are smaller, they are more flexible and open to innovation and even disruption. Most lack scale and are just beginning to create a wealth stack with limited access to data beholden to record keepers that do. Even aggregators with access to capital are preoccupied by the integration of the many firms they acquired led by practitioners who may not be the best business leaders for this daunting new phase.
And wealth advisors that outnumber RPAs by 20x have access to business owners who are trusted clients, have a well-developed wealth stack and intuitive understanding of how to deliver wealth solutions, and are used to and even eager to outsource plan level services like 3(38), 3(16) and group plans with many supported by their home office or custodian. They lack the technology and ability to serve the underserved, smaller investors, are still leery of low margin, high liability ERISA plans, and are not motivated, yet, to search for new opportunities when their current businesses are so profitable.
The profile of winners includes record keepers like Fidelity, Schwab, Vanguard and potentially Empower who could convert participants into wealth clients. Others uniquely positioned include the payroll providers, American Funds, which outsources record keeping and has a top TDF franchise while distributing to both RPAs and wealth advisors, as well as banks like JPMorgan Chase.
Creative Planning and Captrust are two aggregators firmly established in both the wealth and DC markets with unlimited access to capital. Other RPA aggregators are racing to catch up through acquisitions of wealth firms while trying to build a wealth stack—firms like Carson are beginning to wake up to the opportunity to fund new clients in DC plans.
Fintechs like Guideline, Vestwell and Human Interest, fueled by massive PE investment and partnerships with payroll providers and CPAs, are leveraging the booming and poorly served small plan market. Not a new entrant but lagging is Betterment, which is finally waking up to the B2B market through advisor opportunities rather than going direct to plan sponsors. Betterment is uniquely positioned because it built its own record keeping system in 2016, and it own a custodian that serves 800,000 customers with $40+ billion AUM, mostly smaller accounts. They also serve as 600 advisory firms putting them at the crux of the convergence of wealth and retirement able to serve small and start up plans as well as underserved participants. All fintech record keepers have raised impressive amounts of capital, especially Betterment at $437 million with a recent Series F $160 million round.
What is the profile of those that will survive the transition? While scale is critical, it is no guarantor of success. Winners will adapt to new business models like PEPs and retirement income leveraging the profits of old businesses. They will lean into AI and fintech, outsourcing non-critical tasks not part of their core competencies. And, most of all, they will admit what they do not know hiring or acquiring those that do while putting them into leadership positions.
As Bob Dylan wrote almost 60 years ago, “You better start swimming of you’ll sink like a stone for the time they are a-changing.”
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.