More than 30 states have openly considered establishing a mandatory retirement plan for small businesses. This has prompted a large number of employers to search for retirement savings options, many for the first time. The industry has already started making adjustments to accommodate this expanded market, but we anticipate a significant overhaul on 401k product development.
The most immediate changes include:
Simplified plan communication
401k providers will make products easier to understand and use to appeal to a new group of customers who, for the most part, might not have had exposure to a retirement savings plan. Provider websites have already started trimming down the use of industry jargon to make business owners and participants feel less intimidated.
Once a company has opted into a plan, participants should expect to see more platform-level automation and tailored education. This will ultimately create a more intuitive process for plan management.
These system-driven communications will help providers deliver a DIY platform to new audiences who have not previously engaged with retirement products.
Going forward, both private and state providers will put a greater emphasis on participant education in order to drive higher engagement while keeping operational support and servicing costs in check. However, the private sector may have an edge due to their focus on enhancing the digital 401k experience.
The rise of flat-fee pricing models
State plans tend to offer an asset percentage pricing model where the annual fee is around 1% of a client’s assets.
While this type of fee structure may appear cheaper in the early stages of investing, the percentage pricing approach can become rather costly as an individual’s balance grows over time.
In the private market, we are seeing more and more providers lean toward flat-fee or subscription models in their 401k product development. The flat-fee model is generally easier to understand and plan for as a small business owner or participant. You know what you’re paying for the plan every year, and there are no surprises.
Inclusion of a responsible, professional fiduciary
Many employers worry about the fiduciary risk that comes with offering a 401k plan. The state option sidesteps this concern because it is not a fiduciary product, but rather an IRA.
To combat these concerns and compete with state products, we expect more private providers will embed a 3(38) offering into their standard plan to alleviate the burden from the employer.
Integration with payroll providers
Employers are also challenged as it comes to managing all of the back-end administration of payroll and 401k benefits.
Some may even find themselves sending records out separately or supplying their data to a third party to calculate the 401k contribution, creating separate workflows.
This is another area where private providers have a leg up on the state model, as the majority of state products don’t offer a similar degree of payroll automation as the private market has begun to support over the past few years.
We expect there to be a number of new API integrations offered in the private market that could be pitched as time savers, as they offer a more streamlined process that doesn’t require employers to enter their information in more than one place.
Introduction of payroll-deduct IRAs
Payroll-deduct IRAs have historically been an unpopular and rarely sold product in the retirement market. Compared to 401k plans, these plans offer a lower annual contribution limit, and do not allow for the flexibility and tax-saving benefits that typically come with a 401k plan.
Now, with states rolling out their own payroll-deduct IRAs, more employers will be aware of the product and its simplicity, and will likely look for comparable solutions in the private market.
As a result, we are likely to see more private providers develop and begin to market their own payroll-deduct IRAs alongside their current 401k offerings in order to compete head-on with state products. Ultimately, we expect this awareness to significantly grow the demand and supply of these products in the market.
Looking ahead
Ultimately, we estimate a third of small businesses will sign up for the state product, another third will select a payroll-deduct IRA through a private provider and the remaining third will sign up for a 401k plan with a private provider.
The introduction of state-mandated retirement plans has already disrupted our industry. Going forward, we will closely monitor what the adoption and employee opt-out rates look like, the extent to which each state will enforce their individual mandates, as well as what other states join the fight for a secure retirement.
This, coupled with legislation at the federal level, will continue to have a direct impact on 401k product development now and in the years to come.
About the author: Ashvin Prakash is the Director of Product Development at Ubiquity Retirement + Savings. For 20 years, San Francisco-based Ubiquity has helped savers set aside more than $2.25 billion in retirement contributions, and provided small and micro retirement plans for more than 7,000 small businesses. Ubiquity pioneered transparent, flat-fee, customizable plans for this historically underserved community.
Ashvin Prakash is the Vice President of Product Strategy at Everwise Credit Union. Ashvin will create the strategy, roadmap, and overall management systems for Everwise products and services with an emphasis on creating higher value and meeting the financial and operational needs of the credit union. Prakash has over 15 years of experience in designing and launching consumer and B2B financial products and services to optimize business growth and customer engagement.
