This year marks the 50^th anniversary of the Employee Retirement Income Security Act (“ERISA”) of 1974, which established minimum standards for the protection of retirement plan participants and laid the groundwork for the development of the 401k plan a few years later.  These events set in motion a multi-decade shift in the nature of retirement assets.  Fifty years ago, defined benefit (DB) plans were the norm; now, DB plans have been largely superseded in the private sector by defined contribution (DC) plans, of which the 401(k) plan is the most prominent vehicle.

Scale of Retirement Market

Today, there’s about $7.4 trillion in assets held in 401(k)s across some 700 thousand plans and 70 million participants.  There’s an additional $3.1 trillion held in other (non-401(k)) DC plans, and an additional $13.6 trillion held in IRAs (which are often funded by rolled-over 401(k)s). Big numbers, but they’re only a small portion of the roughly $128 trillion in aggregate AUM managed by some ~15,000 RIAs across the U.S.

Defined contribution plan assets are an increasingly relevant part of the financial picture for clients

While the retirement market remains small relative to total wealth managed by RIAs, 401(k) assets and other DC plan assets are an increasingly relevant part of the financial picture for clients. The long transition from DB to DC plans has generated higher growth in DC plan assets than other assets.  The Pension Protection Act of 2006 further amplified this trend by increasing uptake through endorsement of automatic enrollment, automatic contribution escalation, and default investments.  As a result, the share of total household net worth held in DC plans like 401(k)s has doubled from about 5% in 1990 to about 10% today—a trend which is likely to continue given the current legislative backdrop.

Convergence of Retirement and Wealth 

The growth in 401(k) assets and rollovers into IRAs is a multi-decade bullish tailwind for RIAs that can take advantage of it, either by advising plans directly or by advising individuals on their 401(k) assets.  Recently, Envestnet highlighted retirement as an underappreciated growth opportunity for advisors in its Trends to Watch in 2024 report, citing challenges in accessing workplace retirement plans for many SMBs, regulatory tailwinds such as SECURE Act 2.0, and technology innovations that are making it easier for non-retirement-expert advisors to offer retirement solutions.

Offering defined contribution services allows advisors to expand their suite of offerings and access a client segment with an attractive growth profile

Offering DC services allows advisors to expand their suite of offerings and access a client segment with an attractive growth profile.  Relative to a “typical” wealth management client that is withdrawing assets to fund their lifestyle, 401(k) assets have a number of built-in growth levers that can fuel growth for RIAs: new plans continue to be established, clients continue to contribute assets, contributions grow with wage growth or with escalating contribution percentages, and underlying assets grow with the market.

Additionally, there’s an increasing focus in the industry on holistic financial planning, which necessitates taking into account a client’s retirement assets and consideration of the asset allocation, tax attributes, and other features like RMDs associated with those accounts.  Thus, DC service offerings allow advisors to offer more comprehensive advice to clients by addressing an increasingly relevant component to the client’s financial picture.

Beyond deepening relationships with existing clients, offering DC services opens doors to developing connections with SMB business owners (often HNW individuals) and HNW plan participants.  The connections formed through DC services can create a valuable pipeline to mine for new HNW advisory clients.

This is not to say that all RIAs should set out to become retirement plan advisors.  There are potential downsides as well, like fees that are often lower and more exposure to fiduciary liability.  But a growing wealth segment in an industry that often struggles with organic growth is a trend worth watching closely.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.