It’s not a secret: the retirement space has lagged in technological innovation.
However, a new trend study from Vestwell says that’s all about to change. The digital retirement platform provider found that while there have been significant fintech advancements in related industries, it’s been mostly “crickets” in the world of 401k services. But now “it’s the retirement industry’s time to shine” in technology after more than $250 million was invested in the past year alone.
“In a lot of ways, the pandemic served as a tipping point for the industry,” says Vestwell CEO Aaron Schumm. “Advisors realized that they needed to adapt to the changing times by using tech, while personal finance and retirement became a hot topic amidst the pandemic, making it a perfect storm for the industry.”
With 30M+ small businesses in the US and around 600,000 401(k) plans in total, Schumm says, there is a huge market to address, as well as tremendous opportunity.
“Advisors will inevitably start tackling this segment, and while those who are industry veterans may not flip their entire book to small plans, the new advisors who gain some footing in the SMB segment have the chance to be really lucrative.”
Overall, Vestwell’s research shows that advisors are feeling pressure to deliver on clients’ heightened expectations-and they need digital solutions to get them there. An overwhelming 85% of advisors say they are placing a greater emphasis on technology that is used to run their business as a result of the past year.
Notes Schumm, “advisors need to set up their business in a way to be able to scale appropriately. That means finding the right technology and partners is essential for success.”
Digital solutions drive marketing and personalization of services
Following a shift from previous perceptions, social media emerged as the top marketing strategy that advisors rely on with 45% finding social media more valuable now versus previous years, and 25% said it was their most effective tactic. In-person meetings (41%) and websites (40%) were the next most popular strategy among respondents.
The pandemic is likely responsible for part of the shift according to Vestwell’s Vice President and Head of Marketing, Brian Guerra.
“At one point, I think it would have been hard to believe social media could become even more relevant, but COVID-19 has proven that it has. People are online even more and social media is how people learn about and stay in touch with each other.”
And it has affected how advisors conduct business, he says.
“When it comes to an advisor and their practice, it’s a two way street: Advisors use tools like LinkedIn to find leads, and leads use these tools to vet and learn about advisors. And I don’t think we’re at a plateau yet – advisors know social media is important, but not all have fully leveraged it yet. Those who are able to incorporate it into their practices effectively will definitely have a leg up.”
Advisors were also asked what clients want for their 401k, which produced a variety of responses incorporating many of today’s investing buzzwords. Unsurprisingly, most clients want a more individualized approach when it comes to account management (66%)–and advisors are demanding digital solutions to meet this increased need for personalized wealth management.
The drive for personalization of course adds time and expense but the technology powering managed accounts has strived to make these solutions more affordable and easier to offer. The results back this up with 68% of advisors who offer managed accounts saying they have seen an uptick in adoption over the past year alone.
But clients also want plan options, lots of options. Specifically, advisors say clients want the opportunity to incorporate:
- Guaranteed income solutions–51%
- 401k matching on student loan repayments–50%
- Environmental, Social & Governance funds–46%
- Cryptocurrencies–41%
Change brings increased risk
While change can be a good thing, technology advancements can also bring risk and Vestwell says that there has been a 300% increase in cybercrimes since early 2020, with 43% of those cyberattacks occurring with small businesses, who often don’t have the needed level of self-defense.
And of course, since 401k plans are a leading target for hackers, it prompted the Department of Labor to release its cybersecurity guidelines for plan fiduciaries earlier this year.
The guidelines brought anticipated angst to employers and advisors with 73% of advisors agreeing that their clients care more about cybersecurity following a year of uncertainty. This added scrutiny of DOL cybersecurity audits means advisors are scrutinizing technology providers even more. According to the research, 30% of advisors listed cybersecurity as a top concern for the future of their practice, more so than prospecting and client retention.
Advisors also say that what plan sponsors need versus what they value aren’t exactly aligned. When asked what plan sponsors wrongfully undervalue when purchasing a plan, the top advisors said it was fiduciary oversight. Many points down is plan design flexibility (39%) and investment flexibility (37%), both of which are highly dependent on the recordkeeper and other tech providers for a plan.
We all know that underlying technology that powers plans can make an advisor’s life easier or harder and 93% of advisors agree that working with a tech-forward recordkeeper will make it easier to manage their plans.
For decades, technology has had a transformative impact on many industries and it is undeniably having more of an impact on the retirement space than ever before. With more and more digital solutions entering the space, such as fintech recordkeepers, and better managed account solutions, as well as increased cybersecurity threats, more doors will open for advisors to better manage their practice.
And the responsibility falls to the advisor according to Schumm. Advisors need to understand a participants’ perspective, he says and they’ll expect the same experience with a plan that they do with all other financial tools.
“It should be intuitive, seamless, and personalized. If you can’t offer that to your clients, they can get it somewhere else. That’s why knowing your competitors is so important.”
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
You make some very valuable observations, Lynn.
Technology certainly has an important role to play in “retirement” plans. However, as you note, participants want “INDIVIDUALIZED” solutions, and plan providers TODAY are not designed to provide “individualize” solutions. As a CFP®️ and Fiduciary, I see the need for plan designers to incorporate Fiduciaries into the offerings.