401k World is About to Change – Are You Ready? As a result of technology and new laws, the small and mid-size 401k and 403b market is about to go through even more dramatic changes than after the 2006 Pension Protection Act which spawned the growth of auto enrollment, auto escalation and target date funds.
Specifically, what is currently customized (plan design, investment menus and fiduciary services) will be mass produced and what is mass produced (participant services) will be customized.
Today, most companies and organizations are forced to run their own DC plan, including custom plan design, participant education and investment selection if they want to offer their employees a 401k or 403b plan. Though they can outsource investment fiduciary services and administrative oversight to providers, each plan sponsor must still select, pay and monitor each provider. Legislation is pending that would allow unaffiliated companies to join a Multiple Employer Plan (MEP) – the DOL could also simply make rule changes that would accomplish the same purpose. As a result, costs, work and liability would be shared and minimized.
On the other hand, participants in the same defined contribution plan get the same plan design (deferral rates), education and advice. All target-date-fund investors born within five years of each other get the same asset allocation regardless of their financial situation. Today, technology using big data can provide more customized solutions based on a participant’s salary, family status, deferral rate, account balance and access to assets outside of the corporate retirement plan including IRAs and accounts in plans with previous employers.
Driving the transformational change are:
- Plan sponsors looking to lower administrative, advisory and investment fees, as well as limit liability and work.
- Participants that need customized plan design, education and asset allocation.
- Record keepers who want to lower distribution costs for plans sold through inexperienced advisers.
- Experienced plan advisers who need to move down market.
- Broker-dealers that want to minimize liability.
- Increased fiduciary liability under the Labor Department’s conflict-of-interest rule and lawsuits.
So it is not a matter of “if” the defined contribution industry will undergo drastic transformation; it’s just a matter of “when.” Plan sponsors should look for advisors and providers bringing these new solutions which should be available soon as laws change and technology for 401k and 403b plans improves.
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