COVID-19 might be causing a meltdown on Wall Street, but it doesn’t have to create a meltdown in your office. You’re likely facing pressure to answer questions (and maybe even make decisions) regarding your company sponsored retirement plan, so it’s imperative to stay informed. This webinar covers common participant challenges during times of uncertainty and how to address them. We also discuss some of the actions plan sponsors can take should they find themselves required to cut plan costs. Read the full debrief here.
By Emile Hallez, InvestmentNews
Some advisers have indeed been busy, said Aaron Schumm, CEO of Vestwell, which provides digital record-keeping services to about 5,000 plans.
Because of remote work and a standstill in new plan sales, “advisers are probably more accessible than ever right now,” Schumm said. “We’re seeing a high volume of advisers wanting to create proposals for existing clients.”
By Vasyl Soloshchuk, WealthTech Club
We are all frightened by the uncertainty and global health and economic crisis. Fintech helps people to manage their finance during the crisis and avoid ruining decisions. That’s why financial advice and technology tools they use in their work are now raised in importance. It’s time to ask ourselves, in what the most impactful and non-obvious ways COVID-19 will change financial services?
In this selection, WealthTech and FinTech experts share their outlook and words of support with their business fellows, co-workers, and publicity. Find the motivation to keep trying hard and disrupt the world with wealth technology by reading them.
Aaron Schumm, CEO, Vestwell:
Fast-forward to 2020, we have all enjoyed a bull market exceeding a decade. A downturn was inevitable, but I don’t think anyone predicted the catalyst being a pandemic. The globe has and will continue to be impacted. Things will slow. Balance sheets will be strained, and unemployment will skyrocket in the industries most directly impacted, such as food & beverage, travel, etc.
On the positive side, this recession is not caused by a systemic financial flaw. In 2008, the financial industry was at fault. In 2020, the financial industry is being turned to as part of the solution. Fintech companies are at the forefront and best positioned to be bringing creative solutions to the world. With that, we’ll see immediate movement to a sustained cloud-based world, and focus on digital solutions. The companies that held back on moving to a modern era will now likely turn to those that have been at the forefront of change. This will apply to all businesses, including traditional financial services companies turning to fintech companies for solutions.
By Rebecca Moore, PLANSPONSOR
During this time of painful market volatility, sparked by the outbreak of the coronavirus that causes COVID-19, investors are feeling anxious.
The continued message to long-term investors, such as retirement plan participants, is to stay put in their investment selections in order to benefit from the gains when the market recovers. Aaron Schumm, CEO and founder of Vestwell, a digital retirement platform for 401(k) and 403(b) plans, who is based in New York City, says his firm has seen an increased volume of retirement plan participants reaching out about what to do, and his firm is putting more information into participants’ hands.
He says it is a good time to re-educate participants about defined contribution (DC) plans’ use of dollar-cost averaging. Younger participants may especially need this education as some of them have not yet experienced a down market.
By Lee Barney, PLANADVISER
Industry experts agree more retirement plans are selecting “3(38) fiduciary investment management” services from their advisers over “3(21) fiduciary advice services,” and they suggest this trend is not only more beneficial for sponsors and advisers, but for participants as well.
“Originally, the more limited 3(21) fiduciary services were the norm, primarily because the companies advisers were affiliated with didn’t want them to make the final, discretionary decisions as to what a client’s investment lineup should be,” explains Aaron Schumm, chief executive officer of Vestwell. “So, advisers would basically provide sponsors with a list of investment options that they and the sponsor could agree upon—but the sponsors and participants were ultimately left to make their own elections.”
Today, however, the world has moved toward 3(38)-level service, Schumm says, wherein the adviser actually makes discretionary choices about a client’s investments.
By John Sullivan, Editor-In-Chief, 401K Specialist
Digital 401k platform Vestwell says it’s taking a leap forward in the technology it provides, “resetting the bar” across the retirement plan industry by shedding what it calls 30-year-old technology that currently oversees complex recordkeeping.
The capabilities are powered by an API-driven tech stack, resulting in a more efficient, flexible and cost-effective 401k offering, according to the company.
“So much of the way in which the industry does things was put in place pre-internet,” Aaron Schumm, Founder and CEO of Vestwell, said. “Things have come a long way over the past 20 and 30 years, but it’s just time to kind of rewrite how [retirement plan recordkeeping] works and bring it to a way in which we expect our financial lives to be treated. So that’s really what we’re focused on.”
Vestwell now brings all non-custody services in-house
By Ryan W. Neal
Digital retirement platform Vestwell is developing a new technology infrastructure that would do away with the need for traditional record keepers.
Vestwell’s existing technology lets advisers create, sell and manage defined-contribution retirement plans, but founder and CEO Aaron Schumm said the engine still needed connections with archaic record keepers that slowed down processes and drove up costs.
“Legacy providers out there have been around for a lot of years. They work, they perform a function that’s critical to the equation, but it’s old,” Mr. Schumm said. “We’ve revisited, redone and rethought [record keeping] from the ground up.”
With a new investing architecture driven by modern application programming interfaces, or APIs, Vestwell can maintain records in-house on a digital database and take full control over 3(16) administrative tasks such as eligibility, loans and distributions, notices and compliance testing.
By automating record keeping and bringing all non-custody services in-house, Mr. Schumm believes Vestwell enables advisers to offer white-labeled workplace retirement plans more efficiently, cost-effectively and at scale.
“If you’re an adviser and you’re working with 100 retirement plans and each have 30 employees and you want to access those 3,000 individuals, it’s [currently] hard to do at scale,” Mr. Schumm said. “This new framework will remove how record keeping has functioned to date.”
The idea is to help advisers sell and manage DC plans for employers at small and midsize businesses. Because of the high costs, inefficiencies and thin margins of traditional record keepers, these employers’ only options are to offer a generic retirement plan, pay high fees or eschew offering a plan at all, Mr. Schumm said.
Vestwell’s APIs support custom investment management options, bringing 401(k) and 403(b) plans closer to how individual brokerage accounts operate.
“We’ve created the ability for a participant to have their own custody account within a 401(k),” Mr. Schumm said.
The new infrastructure follows several updates from Vestwell since the company attracted a $30 million investment from Goldman Sachs. Vestwell recently updated the user experience of its adviser- and client-facing portals.
The new infrastructure also paves the way for future developments that Mr. Schumm is even more excited about, such as bringing in other workplace accounts like health savings accounts. In the future, he wants Vestwell to support what he calls “next best dollar” decision-making.
When a plan participant gets paid, the idea is that part of their money will automatically be set aside for saving into the most tax-optimal location, whether that’s a DC plan, an HSA or flex spending account, or an individual brokerage account. By allocating money into the best “bucket,” Mr. Schumm said, advisers using Vestwell can help clients with their biggest concern: how they should best be saving.
“The easier we can make these decisions and make this available to people, the more we’re going to help them save,” he said.
While Mr. Schumm doesn’t believe that what he’s built with Vestwell is essentially a digital startup record keeper, for now, he doesn’t have a better word for it.
“We’re expanding the features and functions within this new architecture of a record keeper,” Mr. Schumm said. “In 2021, our focus will be on larger initiatives for where we want to take the industry.”
By Ben Thomason and Fred Barstein
As legislation and technology drive change in the retirement plan market, we are seeing record-breaking rates of consolidation, impactful new regulation such as the SECURE Act, and shifting strategies including the growth of managed accounts. Moving into 2020, Fred Barstein and Ben Thomason are breaking down why these trends have taken flight and what they should mean for your retirement plan business strategy.
Trend #1 Changing Regulation Around Open MEPs/PEPs
There are 5.8 million businesses in the US with100 or fewer employees, and of those, 90% do not have a retirement plan. The SECURE Act was passed in an effort to close this retirement gap, with significant changes made to Open Multiple Employer Plans (Open MEPs), now referred to as Pooled Employer Plans (PEPs). Previously, “open” MEPs could cover multiple, unrelated employers, but all plans needed to file their own 5500s and were subject to the “one bad apple” rule which made them highly risky to sponsors. The SECURE Act introduced PEPs, which are essentially Open MEPs, but they can be offered to unrelated companies with only one 5500 filing and without the one bad apple rule. They must be serviced by a pooled plan provider (PPP). The PPP takes on the role of named fiduciary, plan administrator, and the organization responsible for performing all administrative duties.
PEPs also greatly reduce the plan administration lift through a single plan document, a single Form 5500 filing, and a single independent plan audit, all led by the PPP. They also have streamlined fiduciary oversight, minimizing the legal responsibilities a plan sponsor would need to manage. Finally, PEPs will likely appeal to those small employers who believe plans are too expensive and difficult to administer, and allow them to band with others to access an institutional quality infrastructure they’d otherwise have to build – and pay for – on their own.
What this means for advisors
Retirement plans are sold, not bought, so while new legislation was meant to address accessibility, that wasn’t necessarily the problem. Instead, the problem was around the complexity of plans and misinformation around the cost and time investment for small employers. That being said, just because the SECURE Act passed, does not mean companies are running to the gates – they need to be made aware of the improvements that were made. PEPs create an opportunity for advisors to market small plans in an entirely new way and alleviate concerns smaller companies have around the investment it takes to run a plan.
It’s also worth thinking about the opportunities PEPs create for those around you. This structure makes it easier for financial institutions outside of retirement – such as insurance and benefits providers, among others – to enter the market and cross-sell their existing services while gaining low priced access to the participant. To get a leg up, you may feel inclined to create your own offering, but standing up your own PEP is no small feat. It comes with significant expense and time. Partnering with a broker-dealer or recordkeeper, rather than trying to form your own, can be a more effective way to enter the market.
We also recommend thinking about other partnerships (payroll companies, associations, etc.) that offer marketing access to small businesses and still offer effective ways to scale through not only PEPs, but also traditional MEPs and even your own non-MEP solution. Check out our previous Vestwell U webinar on associations for help on how to tap into this market or our session on traditional MEPs if you’re looking for more information on how they operate.
That being said, just because PEPs are now easier, doesn’t mean they’re always the right option. You can often replicate the same benefits around price and administrative lift elsewhere. There are already a number of recordkeepers offering similar low cost, institutional pricing, and in some senses, you can provide the same value without waiting for 2021 or putting in the investment of standing up a new initiative.
Trend #2: Continued Industry Consolidation
It’s no secret there has been major consolidation across the retirement industry, from recordkeepers, to TPAs, to advisory firms and beyond. Just last year the RIA industry underwent record M&A activity for the 7th year straight and recordkeepers have consolidated from more than 400 just a decade ago to about 160 in 2018. We anticipate this continuing since recordkeeping is a relatively undifferentiated product in an industry with high barriers of entry. Consolidation also helps providers combat the significant drop in participant fees over the past 10-15 years. As recordkeepers take advantage of economies of scale, they can invest in better technology, cut costs, and drive additional revenue through other products such as managed accounts.
What this means for advisors
Consolidation is helping RIAs and recordkeepers not only build out their offerings, but it’s also putting them in more direct competition with one another. For example, large RIAs such as Pensionmark now have participant call centers, among other services, that were traditionally only offered by the recordkeeper. Recordkeepers, on the other hand, are encroaching upon core competencies of the advisor by becoming more participant focused, often in the hopes of competing for the wealth business on the back end.
To combat the heightened competition, advisors should consider the long term nature of their recordkeeper partnerships. There is already a growing fear among advisors that occurs when they move clients to a recordkeeper whose competencies overlap with their own or who is competing with them for wealth business on the back end. There is also increasing frustration around recordkeepers refusing access to participant level data, so it’s important to take your own business plan into consideration when determining where to place your clients’ plans.
Trend # 3: Increased Attention on Managed Accounts
401(k) managed accounts have become more and more popular over the past 5-10 years with the amount of money in these accounts increasing from about $100 billion in 2012 to over $270 billion in 2017. The trend of managed accounts is likely driven by two currents: 1) Fee compression, as these products are a way for advisors to charge (and justify) higher fees and 2) Growing frustration around the stagnant nature, and ongoing conflicts, in current offerings including target date funds.
What this means for advisors
If you don’t have a point-of-view or an articulated solution for a more customized investment structure for participants (ie. a managed account), it’s important to start thinking about one. Aside from fiduciary risk, which leaves you and your plan sponsor vulnerable, it creates a real opportunity to get closer to the participant. That being said, while managed accounts give advisors a better tool to assess appropriate risk for clients, that doesn’t mean they are right for everyone. Target dates funds (TDFs) will likely suffice for most participants under the age of 50 unless they have a lot of investable assets. For those over the age of 50, we recommend implementing a “QDIA 2.0,” to auto-enroll clients into managed accounts which will offer them a more customized approach as they near retirement. Without making managed accounts a QDIA, adoption will be tough.
For a notoriously slow-moving industry, these trends signal that changes are underway. Better yet, several of the trends are aimed at improving things for sponsors and participants. With PEPs, reduced administration and liability make balancing a plan while running a business more manageable. When it comes to industry consolidation, lower fees and better technology mean participants have more money going into their accounts while gaining access to a better experience. As for managed accounts, greater access to a customized approach can help those nearing retirement feel more comfortable with their investments. In turn, these trends help advisors to more strategically align with their client’s needs and market around them. As you build your 2020 plan, it’s important to maintain a pulse on the direction of the market and continue to flex your strategy in a way that best aligns your vision to the needs of your clients.
By Stephen Miller, CEBS
Congress overwhelmingly passed and President Donald Trump has signed into law an end-of-year spending bill and a companion tax extenders measure that contain several agenda items championed by the Society for Human Resource Management (SHRM), including full repeal of the so-called Cadillac tax on high-cost health plans. The SECURE Act, a measure to promote savings by easing compliance burdens on defined-contribution and defined-benefit retirement plans, was attached to the appropriations bill.
By Stephen Miller, CEBS
President Donald Trump on Dec. 20, 2019, signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a bill to help employers create and run retirement plans for workers. The Society for Human Resource Management (SHRM) strongly backed the measure, which the House first passed in May and the Senate approved on Dec. 19 as part of a year-end appropriations package.