While the coronavirus pandemic has forced workers to rapidly adapt to a digital world, it is not the biggest challenge facing the retirement industry as a whole, according to a Friday afternoon breakout session of the NAPA 401(k) Cyber Summit.
While it’s obviously been a game-changer for most industries and the 401k business being no exception, there’s still a bigger, overarching issue facing the retirement industry. That problem? Not nearly enough workplace retirement plan coverage for small businesses.
“Coverage is our biggest issue, Kottler said. “There are 5.6 million employers in the U.S., and there are [only] 575,000 401k plans. I don’t know if our industry always recognizes that fact.”
The roughly 5 million businesses that don’t offer a retirement plan? It’s typically because they have 20 employees or less—a subsection of employers that is dramatically underserved by 401k advisors.
“We haven’t built a business for the small plan market, and that’s the majority of our country, Kottler continued. “And because we haven’t, there are 90 million workers in this country that don’t have access to a 401k plan at their work. And that’s a real problem because the data shows us if they don’t have access at work, less than 5% of them will save on their own.”
Kottler warned that if the industry doesn’t step up to address the problem in a meaningful way, “the government’s going to solve it for us.”
The government, Kottler noted, is already trying to make it easier to address the problem through legislation like the SECURE Act, which is heavily focused on increasing retirement plan penetration into the small business sector.
“How do we build an industry that is fit for what our country really looks like, and that is small business. What do we want the future to look like? With the SECURE Act they put the incentives in place. Taking that legislation and leveraging emerging technologies is how we’re going to get there,” Kottler said.
She added that the industry can and should work to solve the problem before the government comes in with a widespread public option.
“We have the resources, the subject matter expertise, the knowledge—we just have to think about fresh business models,” Kottler said.
The good news? Fintech startups—the disruptors—are interested in reaching the 5 million underserved businesses rather than the 575,000 that already have plans, said Sigal, whose Silicon Valley-based consultancy works with corporations to develop operational excellence in innovation and investment by applying startup and VC best practices.
“If I think about the [startup] companies I’ve invested in around this space, they’re thinking about the 5 million—not the 575,000,” he said. “The bottom of the pyramid is where, as an investor, I see all of the opportunity.”
And harnessing technology is the only effective way you can reach the underserved market. And the effective use of technology hasn’t traditionally been a strong point for the retirement industry.
“If you built [the] 401k today, and you built it based on emerging technologies, it would look quite different,” Kottler said. “We have to meet people where they are, and where they are is everything mobile, everything on their phone, a click away. And when you go look at a retirement plan, it’s usually a website, a clunky website. So we’re not really meeting them where they are.”
“Let’s face it—we’re not there in a digitized world, and that’s really how we need to advance.”
She pointed to the example of how Uber took emerging cellphone GPS technology and created a new business model that severely disrupted the taxicab industry.
“That’s the way we have to be thinking in our industry,” she said. “How do we take the emerging tech and create new business models and new ways of doing things?”
What does this all mean to advisors? Sigal provided three takeaways, summarized as follows:
- Think deeply about what your plan sponsors want to buy, which might not necessarily be just a retirement plan. Are they seeking an edge in recruiting? To provide their employees with a greater sense of financial wellness? What are the other value propositions?
- Innovation and disruption happens at the edges of the industry. Look beyond the retirement industry to see what’s making an impact, such as what’s going on in fintech.
- Take advantage of this crisis to update your legacy system. How do you make your technology stack more agile?
Registered NAPA 401(k) Cyber Summit attendees can access the full session on-demand.
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