At the Helm: Advisers and Clients Embrace 3(38) Services

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.

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Vestwell Tackles ‘Traditional’ 401k Recordkeeping with Latest Tech Release

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.”

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New Vestwell Infrastructure Removes Traditional Record Keepers from Retirement Plan Administration

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.”

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Reshaping Retirement: 3 Trends that Should Influence Your 2020’s Sales Strategy

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.

Looking ahead

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.

 

 

President Signs SHRM-Backed Measures that Include Cadillac Tax Repeal

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.

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SECURE Act Alters 401(k) Compliance Landscape

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.

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#WinnersOfWealthTech Ep 28: Aaron Schumm, Founder and CEO of Vestwell

This month’s Winners of Wealthtech interview is with Aaron Schumm, the Founder and CEO of Vestwell, an entirely new kind of digital retirement platform transforming the way plans are offered and administered — for the benefit of advisors, employers, and employees alike.

Prior to founding Vestwell, Aaron was a co-founder of FolioDynamix, a wealth management and advisory services company that powered $800 billion in assets for over 100,000 advisors. At FolioDynamix, which was sold to Envestnet in 2017, Aaron oversaw the strategy, revenue, marketing, customers and product. Aaron holds a B.S. degree in finance from the University of Illinois and an M.B.A. degree from Duke University, The Fuqua School of Business. He was named as one of 40-under-40 by InvestmentNews and WealthManagement.com’s “10 to Watch”.

Listen to the podcast here!

 

How Can I Offer My Employees a 401(k) Plan?

By Denise Power

If you could create your own fantasy Board of Directors who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, a CO— reader asks whether it is feasible for a small business to sponsor a 401(k) plan for employees.

Ben Thomason, executive vice president of revenue at Vestwell, answers…

Companies know it’s vitally important to have the right people on board to build the business, and a solid benefits package attracts the top talent they need. However, many small businesses assume they do not have the option to offer a 401(k) retirement savings plan.

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Ryan Anderson Recently Joined Vestwell

Ryan Anderson recently joined Vestwell as the Senior Vice President of Product & Design. In 2010, Anderson founded New York City based Alchemy50, an award winning product design studio which was later acquired in 2017. During his time there, his clients included DataMinr, Artivest, FolioDynamix (now part of Envestnet ($ENV), United Healthcare, Thomson Reuters and 1 Second Everyday. Anderson also spent time as the Chief Product Officer for Advizr before it was acquired by Orion Advisor Services.

 Ryan, you joined the company this August to lead product. What drew you to Vestwell?

Let me back up a few years to give you the whole story. I led a product design studio in NYC called Alchemy50 for many years, and along the way we worked with a whole host of financial firms – hedge funds, portfolio managers, fintech startups – all different types of people and products. And what started to become important to me, rather than focusing on the institutional stuff, was thinking about how I could better apply my experience to help everyday people. One of the things that came up in the course of my research was how poorly Americans do with their retirement savings and financial planning in general. So when a former client, Advizr, approached me about becoming their full-time product officer, I jumped at the chance. Through their financial planning and ultimately their wellness platform, I could take my expertise and apply it to people in need.

When Advizr got acquired, I thought, ‘Okay, what do I want to do next?’ That’s when Aaron and Jonathan approached me about joining Vestwell. I knew Aaron and Jonathan from FolioDynamix, another former client of Alchemy’s, and Vestwell’s mission was closely aligned with why I went to Advizr in the first place – helping people make better financial decisions. On top of that, I now had access to recordkeeping and payroll information, which is powerful data to have when creating tech that supports financial services.

 What opportunities and challenges do you see for Vestwell as they build a recordkeeping platform for the modern day?

 I think the big challenge is that retirement plans can have a lot of variables. You have different investment vehicles, enrollment requirements, plan designs, and compliance rules to keep track of. That means there are a lot of levers that need to be set up and maintained to give sponsors and advisors the flexibility they need. Furthermore, a big benefit of our offering is that it’s highly automated and digital. Traditional recordkeepers have outdated, manual processes that don’t make things easy for sponsors and participants. Simple is hard, but we’re 100% focused on making retirement easy.

When working with larger enterprises, it’s important that our service can be white-labeled so that everything coming out of the system appears to be coming directly from them. This is also a challenge, as the devil’s in the details. The more you expose, the more complex it gets and the longer it takes to bring that kind of stuff to market.

So I think the biggest challenge is improving on what today’s recordkeeping systems do in a way that is much more flexible and automated – particularly for smaller plans, which is our focus. If we get this right – and we will – then this becomes an extraordinary opportunity.

 Tell us about your product roadmap. You’ve only had a few months to dive in, but what do you see as your immediate and long-term goals for Vestwell’s platform?

The first thing that stood out to me was how much more we could do with the user experience. This encompasses a lot of things, like the amount of reporting we give to advisors, improving platform navigation, and increasing platform communications. As part of that, a primary focus of mine will be how we better onboard sponsors and participants onto the platform. We’ve done a solid job here thus far, but I do think we can further improve this area via automation, getting smarter about using data, and working with our operations team to better understand their challenges and how best to address them.

Longer term, it’s all about integrations. So if you think about what makes Vestwell unique, it’s that we’re creating a system with a modern technology stack which allows us to be more flexible and better positioned to integrate with many different providers and services.

How do you plan to approach building a product that supports advisors while also ensuring a great product for the end-user?

If you think about what a product does, it solves a problem for a user. And what we’re trying to solve touches all of our users: sponsors, participants, and advisors. Their problems are all a little bit different while sharing a common thread. As an advisor, there’s a trust element; advisors want to know our platform is reliable and accurate and that it can provide what they need to run their business effectively. And in much of the same way, there’s a trust that we have to build with sponsors, too. If you think about how sponsors and advisors interact, it’s not super frequently and when they do interact it is often to solve a problem. So the better we can create a system for the sponsor that does what they need it to do – like taking care of enrollment, engaging their employees, and submitting contributions – the better it is for the advisor. That stuff has to be rock solid.

With participants, the problem for them is simply saving for retirement. Whether it’s registering for an account, making a contribution change, or taking out a loan against their savings, it needs to be incredibly straightforward – and accessible (mobile). Outside of that, they don’t care about much else.

So while I really look at it as three separate problems, and we treat the experience separately for each, there are common elements. The portals for each should be easy to navigate and do what it’s intended for which means information has to flow across all three seamlessly.

What do you believe gives Vestwell a leg up over others in the space?

The big problem is – and it’s the reason why I think Vestwell has such a great business model – there’s a lot of old technology in the industry. The incumbents started in the early 80’s and they haven’t evolved much since. You’re now seeing some kernels of new tech, but the pace at which it’s being built just isn’t fast enough, and the cost to do it is prohibitive in many cases. When trying to meld old technology with new systems, it can be expensive and time consuming. So, I think the approach we’re taking where we’ve started from scratch means we get to look at the problems in the industry today and solve those with a better solution through a modern tech stack. If you look across our team, we are all seasoned, enterprise fintech professionals.  This is what we do, and all we do. In that, we are allowing retirement plan providers to get back to their core, focusing on their clients, instead of trying to be a technology recordkeeper provider.

You’re still the new kid on the block, but let’s fast forward 5, even 10 years from now. What’s your biggest contribution to Vestwell going to be?

I want to help create the modern framework that this 40-year old industry rebuilds its foundation from. Ultimately, I hope that translates into a greater sense of empathy to the problems our users face. I want to help create a system that solves those problems for them.