It seems that there are big winners and losers every decade in the 401(k) market, and the victors in the 2020s are still to be determined. Winners pivot and adapt, leaning into change and not wasting time and energy trying to hold onto what they have, no matter how lucrative. So which providers and advisers will win this decade?
Let’s start with a history lesson and a road map supplied by Harvard professor Clayton Christensen in his seminal book, “The Innovators Dilemma.” Christensen uses the fast-moving computer hardware industry to demonstrate how incumbents usually miss the next wave because it’s less profitable, the clients are different, and their staff isn’t properly trained, especially their salespeople. Mainframe manufacturers missed client server computers, which missed desktops, which missed laptops, notebooks and smartphones. Apple, which almost went bankrupt until Steve Jobs returned, is the rare exception.
In the 1980s, the 401(k) market was dominated by banks and insurance companies offering guaranteed insurance contract products to try to mimic pension plans. Defined-benefit providers did the record keeping, charging a fee for service, with sales made direct to plan sponsors.
The 1990s were dominated by mutual fund companies, led by Fidelity and followed by American Funds, Putnam, MFS and others, that offered “free” record-keeping services and used retail share classes to offset costs. Only proprietary mutual funds were available, with sales through advisers. Larger insurance companies and banks lost out, as did their insurance products during the booming 1990s stock market. Wirehouses and independent brokers dominated, often receiving outsized commissions.
In the 2000s, insurance companies leveraged the demand for nonproprietary funds and the burgeoning small market by wrapping investments inside a group annuity, partnering with local third-party administrators and selling mostly to blind squirrels, some with just insurance, rather than securities, licenses. Smart RPAs adopted a fiduciary asset-based fee model to distinguish themselves, focusing on the high fees paid to providers and brokers. Mutual fund providers that couldn’t adapt to open investment platforms and didn’t have the technology expertise exited the record-keeping business for the burgeoning defined-contribution investment-only market.
Payroll companies emerged as major players in the 2010s, while record keepers with scale acquired weaker competitors. Aggregators of retirement plan advisers emerged, led by Captrust, SageView, NFP and NRP (now Hub). The auto-plan enabled by the 2006 Pension Protection Act led to the growth of target-date funds and the focus on fees fueled the popularity of index funds. Weaker DCIOs without significant target-date fund, indexing or record-keeping franchises faltered.
The start of the 2020s has been dominated by the three Cs — Covid, convergence and consolidation — with each one fueling the other. The demand for more convergence through government mandates could explode the small and startup plan market enabled by pooled plans. Even strong providers with scale like MassMutual and Prudential sold their record-keeping divisions as the Fab 5 plus Ascensus and the payroll companies distanced themselves from the rest of the 30 other national providers.
RPA consolidation has blown up, fueled by private equity, with high valuations and 70 deals in 2021, although that pales in comparison to the RIA market. Four fintech record keepers raised $780 million, which is miniscule compared to the wealth tech industry, which raised $56 billion in the first quarter. Collective investment trusts are taking over from mutual funds and managed accounts should eat into target-date funds’ market share.
So who will the winners and losers be this decade?
Record keepers with scale who can cross-sell wealth management and other financial services will win, as will RPAs. They have no choice. Record-keeping fees are stagnant and cost savings diminish the bigger they get. Triple F advisers — focused on fees, funds and fiduciary — have been commoditized, and plan fees will continue to decline — participant fees will be required to justify the multiples paid by PE firms.
Fintech record keepers that can ride the small and startup market either directly, like Guideline, through advisers and record keeper partners like Vestwell or through pooled plans like Smart Pension, will prosper. In-plan retirement income led by annuity providers will grow if DC plans are to effectively replace pensions.
So the battle in the 2020s will be about the participants, smaller plans fueled by government mandates and retirement income. Advisers, providers and investment or risk managers will compete and cooperate depending on the client, circumstances and relationship. With access to data and control of technology, the Fab 5 are best positioned, followed by aggregators — most likely RPAs but also large RIAs like Creative Planning that have a huge wealth management advantage. Fintech, money managers and insurance companies will be the arms dealers.
The stakes are high, as are people, technology and financial capital required to compete. There will be no prizes for surviving or being competitive, and those that try to hang to the past on for fear of losing what they have will only make their fears come true faster.
Retirement market opportunities for aggregators
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.