401K Begging for Disruption in the USTags: 401k, asset management, disruption, wealth management
This blog post is a call to action to all entrepreneurs interested in financial services and fintech in general, and the asset management space in particular. Let me, by way of a prolegomenon, paint the market picture.
The 401k market in the US is worth +$4.5 trillion as of 2015 and approximately 50 million workers participate in one or more plans. So far so good as the opportunity is material. Fees range from 0.5% to 1%, that is fees an employee is “allowed” to understand, fees that are disclosed in a somewhat transparent way. When one starts inquiring and uncovering hidden fees and transaction costs, the tally can easily shoot over 3% in some cases. Let’s assume the average all in cost is 2.25% for mathematical simplicity. Do the math, 2.25% of $4.5 trillion equals $101 billion. Let’s round that to $100 billion. Now, as an entrepreneur, you have the motive which is also material.
Thinking about disrupting the equivalent of $100 billion in fees makes my mouth water as an investor. I am surprised the Sillicon Valley has so far only focused on traditional investment vehicles with the Robo movement, see my previous post here on the subject. It can be only a matter of time for the 401k market to feel the full force of a tech disruption though. Granted, the 401k industry is much more complex than other corners of the retail investment industry. On average, the value chain is comprised of a variety of actors, each of whom are very specialized, where custody, compliance, regulation, state and federal law all conspire individually and collectively to create a hairy operating framework. Still, disruption is only a matter of time.
Initially I see two ways through which disruption could occur:
– Direct to consumer play that provide services to employees and helps them systematically optimize their 401k portfolio and directs them to lower cost products. D2C plays are always expensive, that is the rub.
– B2B play that helps sponsors, i.e. employers, deploy cost effective plans. Where should the B2B solution be deployed – at custody level, at asset management level, at fiduciary level – that is the question.
To summarize, we have the opportunity and the motive. It is up to the the startup team to build the means in order to facilitate the perfect