We sat down with Josh Forstater, SVP of Strategic Partnerships at Vestwell, to discuss why in the world hundreds of millions of dollars are being poured into the 401(k) fintech space - and the opportunity it presents for advisors.
Question: Why are investors all of a sudden pouring millions of dollars into this space?
I think that for a lot of fintechs 401(k) is a huge opportunity. Because while those of us in the industry think a lot about the challenges and the fee compression up market, for these fintechs they’re instead of looking at the addressable market among small businesses. And if you're a tech provider, at the end of the day, your advantage is efficiency and ability to streamline things and price really, really low to compete. The end result of all those things is that there's a tremendous opportunity for these companies in terms of adding new 401(k) plans in the marketplace, as well as servicing some of those smaller clients or emerging corporate clients out there.
Question: How are fintech 401(k) providers different from traditional ones?
What I've always thought that really what fintech represents is taking code that historically lives behind some administrator. So you had to go to a bank teller, and they had some piece of proprietary software that they played with, but you as a user could never touch it. You had to go into the bank branch. What fintech represented was democratizing that and giving that to a sponsor who employs a bunch of people so they could set up a 401(k), right on the portal. Then somebody can go and set their investments, change their lineups, or request a loan or distribution right on the site. And that's true, whether we're talking about 401(k)s, or whether we're talking about doing maps, instead of using Rand McNally. And so that comes with a 401(k). And what it introduces is new distribution and sales models. Gone are the days where you necessarily have to sit face to face in a conference room with the investment committee. It allows for a segmentation of a business that never existed before. There's a big difference between the very deep extensive consulting needs that so many TPAs do a great job providing, and what some other folks need, which is they need essentially QuickBooks for 401(k). And so technology allows folks to pick and choose what they want, how they want, when they want it, and how that appears on the screen. And that's what's so exciting, I think, to investors pouring money into this space, and to advisors and small businesses who are buying into these solutions.
Question: Why should advisors be paying attention to these new fintech providers?
I think there's a lot of advisors who are really forward thinking, because the reality is that, in the wealth world, you've seen a tremendous amount of technology introduced through EnvestNet, Tamarack, and lead generation tools. And so within 401(k) itself, I think, as fees compress, advisors need to be thinking about how to expand their practice. And the only way to do that is to go to a new market or a new approach. And what fintech represents is the ability to take a small business market that wasn't very profitable, and create a really efficient model that they can scale to a lot of plans. You absolutely have to know who Vestwell is, who Guideline is, who Human Interest is, what the other providers coming in the market like Smart Pension are and why they exist and how they can help your business, or, how they're trying to disrupt your business. Because if you're not doing that, then someone else is and that puts you at a disadvantage.