As the defined contribution industry turns its focus to serving participants beyond just saving for retirement, the question is who is best suited to help—advisors or record keepers? It is an existential question driven by the need for each group to generate additional revenue as plan fees continue to decline. Can advisors or providers who rely on plan fees alone compete? And will record keepers and advisors who focus on participants go to battle or find a way to co-exist?
The ancestors of retirement plan advisors were wealth advisors and financial planners who backed their way into the 401(k) industry, more comfortable working with individual investors than plans. They began to differentiate themselves by focusing on plan services as a co-fiduciary, promising to lower record keeper costs while avoiding participant services, which they deemed to create a conflict of interest.
Mutual fund companies led the small-to-mid-market record keeper initiatives in the 1990s, most of which wanted to boost assets in existing funds, with a few like Fidelity, American Century, Vanguard and T Rowe Price, who at the time sold directly to individuals, potentially building relationships with investors.
As most mutual fund providers exited the market, concentrating on investment-only services, they became twice removed from participants relying on advisors and record keepers for access, exacerbated by professionally managed investments like target date funds and managed accounts. Many insurance providers dropped out as annuities with high and opaque wrapper fees grew out of favor.
There are 121.3 million participants enrolled in DC plans, according to a late 2024 Congressional report, with 96.2 million active and 83.4 million in 401(k) plans alone. Combined with $12.4 trillion in DC plans with $1 trillion rolling out annually, mostly into IRAs, which have $17 trillion as of Q4 2024, as well as the explosion of new plan formation due mainly to state mandates, it’s hard and possibly stupid to ignore the obvious opportunities.
But big questions remain. Who is best positioned to serve these participants? Does anyone have the “right” to serve them? Can we safely and securely use and obtain clean data? How should each participant segment be served? What is the role of AI in delivering advice at scale to the masses? How will the expected entry of wealth managers and financial planners affect the industry?
Most of the larger ESOP providers give away administrative services to access participants. Is this the new model for DC record keepers, with one of the largest reportedly losing money on record keeping for years to boost assets in proprietary funds and serve participants in their plans?
The largest RPA aggregators have been aggressively buying wealth shops to leverage captive DC participants willing to offset plan-level fees, making it harder for purists. RIA aggregators like Creative Planning have bought RPA firms, while others like Hightower and Mariner are acquiring institutional investment consultants. Former Morgan Stanley CEO James Gorman quipped that the workplace will be the greatest source of assets for wealth advisors in the next decade.
Like gravity, convergence is a reality that awake providers and advisors are leveraging while weighing down others. But rocket engines, sophisticated technology and high-grade fuel are needed to overcome gravity.
Convergence is potentially pitting advisors who sold and manage a plan against their record keeper partners. The question is not just who stands to profit the most or is best positioned; the question is what is in the best interest of the participants because of ERISA fiduciary mandates.
There are three major participant segments:
High-net-worth or those with more than $3 million in investible assets (3%)
Mass affluent with $500,000-$3 million (10%)
All the rest, which include:
a. HENRYs (high earners not rich yet – 25% of workers under 30)
b. Close to retirement (20%)
c. Less affluent
Each segment needs and wants to be served differently. Most of the HNW will already have an advisor who can access and manage their DC accounts through firms like Pontera. The mass affluent and perhaps those 55 or older are attractive to RPAs and RIAs. The HENRYs will take patience, while the less affluent are a challenge likely best served by record keepers and larger advisory firms leveraging data, AI and call centers.
Record keepers have the data and branding advantage through participant portals, while advisors have personal access. Most participants do not even know who their record keeper is, while most advisors do not market themselves beyond group meetings.
The battle for participants will be limited to a subset of advisors and providers ready, willing and able to service them. The well-heeled aggregators and broker/dealers will have negotiated treaties with the major record keepers that want to leverage participants eliminating those that will not come to terms.
So the battle for participants, if there is one, will be very limited, with plans sponsors, regulators and courts overseeing and approving rules of engagement. Though there will be breaches, which advisors love to focus on, providers and advisors need to work together for their own sakes and that of the participants, avoiding a global or nuclear war where no one wins.