5 years forward: Retirement industry predictions from a fintech entrepreneur

The retirement industry is at a crucial time in its history, facing a generational growth opportunity, which I believe will be led by advisors who are able to efficiently scale their small business ERISA advisory practices. 

Over the next few years, the small plan 401(k) market is projected to grow by 111% and will reach over 1,000,000 plans by 2025. The same projections estimate over 100,000 small businesses will set up a new 401(k) plan each year from that date forward. 

Several secular factors will continue to contribute to this level of growth: new fintech providers are significantly driving down the cost to offer the benefit in both fees and “soft dollar” costs; 48 of the 50 states either have a mandate in place or are in talks to pass a mandate; SECURE Act tax credits significantly expanded credits available to companies, and new retirement plan structures are being created to increase plan adoption.

Looking forward over the next five years, I anticipate an increased industry focus on recordkeeper consolidation, financial wellness, advanced technology solutions, and sponsor engagement. 

Recordkeeper consolidation 

It’s no secret that the race for scale is on for recordkeeper consolidation. In the existing marketplace for 401(k) plans, there is limited high-growth opportunities, from an organic growth perspective, as the space is already mature and competitive. That’s why over the past few years we’ve seen an accelerated number of acquisitions in the industry, as often the only way to grow is to acquire other firms. We’ve seen Empower buy MassMutual and Prudential’s full-service retirement business, Acsensus rolling up with Newport Group, Integrated Pension Services acquiring Benefits21, and Franklin Templeton’s acquisition of Legg Mason’s recordkeeper. 

As covered by industry veteran Fred Barstein, the recordkeeper industry is currently in stage three of consolidation, based on the HBR article, the consolidation curve. 

According to Fred, the “Fab Five” listed above are the largest candidates for leading stage four of consolidation. Over the next five years, advanced technology solutions and advisor support diversification will be essential for preventing full consolidation in the market. In theory, on the road to stage four, we could see more existing large 401(k) companies deciding to sell instead of investing in the exorbitant spend needed to stay competitive in this mature market. If we do reach stage four, there could be a significant lack of investment and innovation in the market, as the largest players will not have a need to differentiate themselves. 

What does this mean for the next five years? I believe more RPAs will adopt new platforms to scale their businesses, offering a wide range of financial services while strategically engaging the small plan market. At the same time, startups with inexpensive technology-enabled solutions will also continue to see rapid growth to support the demand coming from these RPAs. 

Advanced tech solutions

I’ve worked with large institutions and advisors my entire career. Having done so, I realized there was an inherent need to create a new platform that solves the pain points advisors face, from the inside out. My goal in creating my company was to provide advisors with something tangible to help them differient themselves in a cost-effective way. As the traditional 401(k) market has been dominated by the large plan market, I foresee technology being a key factor in solving some of the nuanced issues preventing advisors from reaching the rest of the market, or the 99%.

As I mentioned in a previous article, I believe RPAs need access to an affordable, white-labeled, and fully customizable recordkeeping solution if they are going to directly compete with these legacy institutions. 

I predict a greater need for advisors looking for a user friendly, streamlined technology solution that guides the individual participant 80% of the way through their financial journey, while allowing for customization through a human element. As fintech providers advance in the market and take some of the administrative pains off of the advisor’s plate, I see advisors offering a more qualitative approach, leading to successful retention of their clients, while expanding their businesses.

The rise of financial wellness

Financial wellness is not only a trending topic, it was also a significant impetus for us creating our managed accounts solution in partnership with Franklin Templeton.

We’re seeing participants are focused on current loans, rather than planning for 30 years from now. However, retirement advisors have historically helped employees with only their 401(k)s. We’re seeing the advisor role expanding to incorporate 529s, HSAs, emergency savings accounts, and more. This creates a huge opportunity for advisors to assist their clients with more than just retirement planning by gaining access to every aspect of an employee’s life. I believe the largest value add for an advisor in the foreseeable future will be the ability to incorporate a range of savings solutions into the workplace within a seamless platform solution. 

Sponsor engagement

The “great resignation” is dominating news cycles, impacting almost every industry. There are many approaches to employer retention, however I believe a key driver in this conversation will be employee benefits. According to the recent Morgan Stanley at Work study, 95% of HR executives reported their company’s reevaluation of their financial benefits package is a priority for next year. It’s because of this, I predict an increased need to engage financial advisors from the sponsor side. 

As an entrepreneur, I can empathize with running a small business and experiencing first hand the challenges I previously faced in looking for a 401(k) plan for my employees. Most small businesses don’t have a benefits team in place and often find the process of selecting a provider challenging, clunky, and most importantly – very expensive. From state mandated IRAs to an increase in small plan options, now is the time for small businesses to take advantage of these workplace savings programs and look beyond the 401(k) plan. I anticipate employers expanding their offerings to thoughtfully increase retention and engagement efforts amongst their employees.

I’m looking forward to the next five years and beyond. Our industry has a great opportunity ahead of us to serve small businesses across the country and help close the savings gap.

Aaron Schumm is Founder and CEO of Vestwell.