Sanjay Prasad, Head of Capital Markets and Insurance, TCS BaNCS – North America
The good old 401K has been the warhorse of the US Defined Contribution segment of the Retirement products. As we keep pace with industry trends, there are some very interesting sound-bytes coming out around the modernization, re-imagination of 401K products and what the future beholds for the Retirement Industry.
The US Retirement market is a whopping $37.20 Trillion2 with $7.30 T assets under 401K plans1. The name 401K came by accident and the Johnson companies were the first to offer a 401K Plan to its employees3.
There are many ways to dissect and analyze the US 401K and Retirement industry to anticipate its future. This article attempts to look at the evolving macro-dynamics surrounding the wealth and financial wellness needs of the US population and use that lens to gauge the future of Retirement products and solutions. To put it in another way, perhaps it is time to stop looking at 401Ks in isolation, and rather see them as an element of the overall retirement plans and an even smaller element of the financial wellbeing and wealth management needs of the US customers. This approach may perhaps construct the retirement products that complement as well as hedge against each other.
The Evolving Macro Dynamics:
Multi-Generational and Multi-Demographic Workforce:
Never in the history have five generations, and a dozen or more sub-segments within between them, been out there in the workforce and each sub-segment feeling empowered to lay out their unique set of needs, expectations and plans for retirement.
While the silent generation still in the workforce may mostly comprise of those struggling to retire, perhaps the other half of this generation is happily retired and looking for ways to transfer their wealth. The Baby Boomers on the other hand want to secure their nest egg while enjoying the same. The GenX have figured it out somewhat or are scratching their heads. The GenY (a.k.a. The Millennials) and the GenZ believe in their herd and the technology more than the advisor. For them crypto is cool and ‘FOMO’ and ‘Why Not’ defines their risk appetite. In short, the good old 401K is nowhere close to being Good Enough! The #New401K needs to quickly evolve or the GenZ will Uberize it in their own disruptive way.
Ingress of FinTechs and the Rapidly Evolving Technology
FinTechs are reminding us of the what the great Mahatma Gandhi once said, “Be the change that you want to see”. Betterment and WealthFront rocked the market with Robo Advisory and quickly started attracting the Millennial dollars, not much but still significant enough. While the big bank on street ignored the move, the firm in Malvern, PA decided to create FinTech within itself and could launch Personal Advisory Services at 30 bps and Digital Advise at 15 bps in a very short time. It is perhaps now necessary to add the same agility and innovation to the 401K and bring it under the holistic goal planning purview.
The Advent of the Digital Assets and in Particular the Stable Cryptos and the NFTs:
Cryptos have been seeking a place on the Main Street and a seat on the Financial Advisor’s table for sometime now. We can all agree that that the traditional cryptos and their volatility may not be conducive for the conservative retirement product, however, the advent of the stable crypto viz., CBDCs and stable coins opens up completely new dimension for the retirement portfolios. This will necessitate the new 401K platform to support both traditional and digital assets under a single platform. Technologies like Quartz, will enable interoperability of on-chain and off-chain systems creating pathways for the plan provider to offer digital assets for 401K and retirement products.
To conclude, good old 401K has been the backbone and the defined contribution industry for four decades now and barring the five-hundred-dollar annual increase in exemption limit by the IRS and employers offering better matches, nothing much seems to have changed. Given their impact on the American workforce and the advent of new technologies and asset classes, there is a compelling case to reimagine the, although proven, warhorse and make it an even more attractive savings product for the current and future generations.
Sources and Credits:
1.As of June 30, 202, (https://www.ici.org/faqs/faq/401k/faqs_401k)
2.Includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private- and public-sector employers), individual retirement accounts (IRAs), and annuities.
Disclaimer: Views or opinions represented in this blog are based on the author’s own research and do not represent TCS BaNCS.