Fred Barstein has spent the bulk of his professional life—more than 20 years—in the retirement plan industry. Specifically, the 401(k) industry. Today, he sees that industry on the cusp of significant change.
“The 401(k) world is basically upside down and needs to be totally changed,” Barstein told attendees at the 2017 SVIA Fall Forum in October. “Everything customized needs to be one size, and everything one size has to be customized.” Translation? Small employers need to stop being responsible for designing and running their own small plans and adopt a more economical one-size-fits-all approach, while large employers with greater resources continue to customize their plans to meet their specific needs.
Barstein, founder and CEO of The Retirement Advisor University, its affiliate The Plan Sponsor University, and, more recently, 401kTV, supports the idea of creating pooled employer plans, or PEPs, for small employers. PEPs would be run by a professional fiduciary and would be open to multiple unrelated employers, similar to the way mutual funds are open to multiple investors. Unlike existing multiple employer plans, or MEPs, which are open only to employers who share an affiliation, PEPs as currently envisioned would not be subject the so-called “one bad apple rule.” That rule effectively states that all plans in a MEP can lose their tax-qualified status if just one plan fails to meet tax-qualified plan criteria. Applied to PEPs, the rule would likely keep many small employers from throwing their lot in with others.
Several pieces of legislation that would allow for the creation of PEPs have been introduced in Congress. While none have yet passed, Barstein said there is widespread bipartisan support for the PEP concept, which he predicted could revolutionize the 401(k) market. “We think it’s not a matter of if it happens, it’s a matter of when,” he said. “It just makes so much sense.”
Turning to the subject of stable value, Barstein called it the “second most important asset class for the retail defined contribution plan market” because many plan participants place a premium on capital preservation. But he cautioned that many investment advisors catering to the retail market are unfamiliar with stable value and hence don’t recommend it. “There’s an opportunity educate them, but you’re really starting from zero,” he told his audience.
The small plan market also has been slower than the large-plan market to embrace plan design features like automatic enrollment and automatic escalation of participant contributions, Barstein said, but those features are gradually finding their way into the marketplace. He estimated that about 40 percent of small plans have adopted them. Meanwhile, small plans are becoming highly sensitive to fees, driving them to put more index funds into their investment lineups and more seriously consider offering collective investment trusts.
Looking ahead at the retail defined contribution plan market as a whole, Barstein said he sees an industry that will have fewer investment advisors, broker-dealers, recordkeepers and defined contribution investment only providers as fee compression makes those businesses more challenging. He also foresees fewer plans but more PEPs, and greater plan sponsor engagement with their plans.
“Hopefully we’ll see more participant engagement, too, but we haven’t figured that out yet,” he concluded, contending that efforts to educate plan participants have failed to make a significant dent in their behaviors. Partly for that reason, Barstein endorses greater adoption of the “Save More Tomorrow” plan design created by behavioral finance researchers Shlomo Benartzi and Richard Thaler. Their design centers in part on getting plan participants to commit to contributing more of their pay to their retirement plan at some point in the near future rather than immediately, because research has found them more open to that idea.