Data is the lifeblood of the 401k business. For many, the amount of data accumulated is among their most important assets. The cliché that knowledge is power is now truer than ever. In the 401k financial world, that power comes not from simply having the raw information, but from how it is processed and then used as the basis for planning, strategy and reporting.
The challenge data presents to retirement plan sponsors, mutual fund providers, insurance companies and others in the 401k industry is not a lack of information but rather an its overabundance. Receiving massive amounts of data from multiple sources, its’s obvious that the most efficient processing solution for companies is a customized data stream that only contains information relevant to the specific subscriber.
Unfortunately, many data service providers offer little more than a massive data dump, leaving it to the bank, insurance company or other institution to manually parse the mountain of information to get the data that is applicable to their system.
This cumbersome process can be both time-consuming and expensive, because data dumps tend to be over-weighted with useless information. Investment professionals who don’t have access to integrated technology are often reduced to work-around solutions like screen scraping data from Yahoo Finance or some other website. In fact, a recent survey of financial advisors by Aite found more than a quarter of independent RIAs and more than a third of independent broker dealers were sill relying on manual data sharing.
The potential for human error when using such ad hoc approaches is tremendously high and mistakes in data entry can end up extremely costly—for example, if the income information entered is off, then the account information will be incorrect which will throw off tracking for the client.
Simply put, if the core source of your data is inaccurate, there’s no way your books and records can be accurate.
The Department of Labor’s fiduciary rule, which the Trump administration may or may not let take effect, has caused most companies to take a new look at the quality of their incoming data and look for new ways to increase efficiency. In order to meet increasingly stringent regulations such as this one regarding retirement accounts, it is imperative that retirement plan advisors and sponsors have clean, accurate and consistent data.
Regulatory requirements for transparency and level fees means that massive amounts of data need to be gathered and aggregated quickly and accurately and the vast majority of service providers are simply not in a position to comply.
In the past, most firms have simply taken the fees provided to them from their sub-custodian as correct, then allocated to the best of their ability back to the shareholders. The disclosures provided to shareholders generally discuss a range of fees that may or may not be collected, but that practice will no longer pass muster.
It’s not just 12b-1 and other service fees that need to be tracked and reported, there are also issues around income reporting. For example, when a mutual fund that is included in a 401k plan pays a dividend, that dividend has to be allocated out to the participants in the fund. And of course, since every fund has its own ex-dividend date, that’s an ongoing process that can cause major back office issues.
Increasingly, retirement plan sponsors and advisors are turning to automation for onboarding and other processes where human error could be a factor. Many forward-looking firms are looking to avoid non-compliance issues by turning to exception-based processing systems coupled with specific subscriber data that allows for the proper disclosure and allocation of fees at the participant level and ensure that income is collected and posted correctly, a critical step in upholding fiduciary responsibility.
To conclude, when financial data serves as the foundation of your business, it is more important than ever to utilize technology to strengthen that foundation, whether it’s harnessing the fire hose of financial information or simplifying the complexities of mutual fund processing. Manual data gathering and processing can create cracks in your foundation that only worsen over time.
Bob Ward is Chief Revenue Officer with Vertical Management Systems (VMS).