As new 401(k) and 403(b) plan formation explodes and is expected to continue primarily due to state mandates and worker demand, the natural question is, “Who will serve this market?” Payrolls and fintech have stepped up, but service can be lacking, while traditional providers struggle to make money as their costs rise and fees decline.
Banks, which seem to be a logical solution for smaller start-up plans, have mostly retreated from defined contribution record-keeping except for JPMorgan Chase. But as we often see, logic does not always turn into reality.
The explosion of plan formation is real, with payrolls and fintechs booming, some through PEPs. Retirement plan advisors tend to shun smaller plans as revenue and wealth opportunities are limited, while the jury is still out whether non-specialist wealth advisors will step up. Neither benefit brokers nor insurance company reps have shown interest, even though logic might indicate they should.
So what about banks?
The DC record keeper graveyard is littered with them, including behemoths like Wells Fargo, Citibank, US Bank, M&T, Truist and Fifth Third. Over a decade ago, JPMorgan sold its large market provider to what is now Empower, turning its focus to smaller plans, leveraging bank relations and outsourcing record keeping to Empower and now Vestwell, which replaced SS&C.
So why has JPMorgan succeeded where so many other banks have failed, and will there be a resurgence?
Banks are trusted financial institutions that most people and all businesses work with—they are highly regulated with their reputations mostly recovered from the 2008-09 mortgage crisis. Businesses and people interact regularly with their bank, which have critical data with deep technology resources leaning into AI.
Sixty-six million households bank with Chase, according to Stephen Rubino, head of Retirement, as well as 7 million small businesses, but their secret sauce may be their asset management division, where the record keeper sits. They have a legitimate target date fund, which subsidizes all or most of the record keeping costs, as well as a significant distribution to both RPAs and RIAs. It might be an easier sale for an advisor if that business banks with Chase.
Will others follow?
Aaron Shumm, Vestwell’s founder and CEO, and Managing Director Eli Landow believe more banks and credit unions will want to enter the DC market, which is a big focus as the firm currently engages with two regional banks. If done properly, a private-label DC offering can be on the main customer website with a single sign-on to start or manage their plan, just like some payroll providers.
“Banks have a trusted relationship with customers,” noted Schumm. “They should have something in place if only to retain business.” There is also wealth management and maybe banking opportunities with employees of plan sponsors.
So why haven’t more banks entered the DC market as record keepers, likely outsourcing, or advisors?
“Banks move slowly,” Landow said. “They are very conservative.”
Which is likely why so many exited the large DC plan market, one they dominated in the 1980s and 1990s, along with insurance companies thinking they had an advantage with banking clients. But as fees declined and margins in the institutional market became razor thin, even JPMorgan exited the market driven in part by concerns about litigation, liability and conflicts of interest. And with the DC market changing rapidly, banks could not pivot.
Banks like Truist exited by selling their record-keeping business to Empower and Ascensus and their advisory practice to OneDigital, which has gobbled up similar divisions of Wintrust, Huntington and Zions Bank. Schumm may eventually be right about opportunities with credit unions, but so far, none have been successful working with business clients, which tend to be smaller.
The main record keeper, CUNA Mutual, now TruStage owned by credit union members, is struggling. Similarly, community banks have not emerged watching their main record keeper, Pentegra, suffer a $48.5 million settlement for multiple fiduciary breaches.
Cambridge Trust, acquired by Eastern Bank in 2024, has $12 billion in wealth and over a billion in retirement, mostly defined benefit and trust work. It has hired an RPA to leverage the bank’s clients and feed the wealth business. Though Truist sold its advisory business to OneDigital, it has restarted it.
Maybe JPMorgan is a unicorn due to its wealth management capabilities and investment products. But small businesses are going to look for help as they are either required to start a plan or see it as a necessity to recruit and retain employees. Banks seem like a natural resource with client relationships and access to critical financial data who, in turn, can private label and outsource record keeping to firms like Vestwell.
But like with wealth advisors, it’s not obvious that many will lean into DC opportunities, which are highly regulated, subject to litigation risk, and have razor-thin margins unless they can cross-sell other products and services to participants, which come with their own risks and challenges.
#Banks #Poised #Enter #401k #Market #Plan #Formation #Surges