The retirement industry is complicated, outdated, and serves a workforce that no longer exists.
Roughly half of us don’t have access to a workplace retirement plan — that’s 55 million people. Worse, the number of people with access to a workplace retirement plan, a 401k, has been declining for years.
A system that fails half of us is a system that is failing all of us.
A Complicated History Produced This Complicated Product. For decades, the $8-trillion 401k industry has had a virtual monopoly on workplace retirement savings plans. 401ks dominate the retirement ecosystem and have become the very definition of a retirement savings plan. The problem, of course, with all monopolies, is that they suppress innovation, keep fees high, and don’t serve the evolving needs of the marketplace.
To its credit, the 401k industry has played a critical role in helping millions of people save for retirement, and will continue to be an integral part of the retirement savings ecosystem.
But, in the forty years since 401k plans were created, the workforce has changed in dramatic ways. Today, people are mobile and change jobs frequently. There are also new types of employment arrangements, and many of us will never have a traditional employer.
These shifts in the workforce require a parallel shift in how people access retirement plans. Yet, the retirement industry displays an almost Teflon-like ability to resist change, even at a time when the industry is losing ground. Worse, clinging to a one-size-fits all approach to retirement savings is a failure of innovation that is costing millions of people their financial futures.
Many aspects that were once considered unique plan features of 401k plans have become structural flaws, artifacts from a bygone era.
Limitations of 401k Plans
Lack of portability. Today, people change jobs every four to five years, which means that fifteen million people change jobs each year. And every time you change jobs, you have to change your plan, assuming you have one.
This is all because a 401k plan is set-up and sponsored by your employer, which means that you cannot participate in their plan when you leave.
You must then decide where to move your retirement savings, which isn’t always obvious. When faced with this decision, many of us do the wrong thing: cash out, abandon our account, or roll into a high-fee product. Lack of portability is a big problem.
Unfair eligibility leaves a lot of people out. The 401k system has high restrictions about who is qualified to have one. Typically, “qualified” means that you are a full-time employee who has worked for your employer for a certain period. Unfairly, if you’re a part-time employee or independent contractor, you’re not eligible. This comes at a time when many American companies are shifting away from hiring traditional employees, and towards independent contractors.
If you’re an employer, surprise, you’re a fiduciary. Over the past decade, several high-profile lawsuits have brought an increased level of attention to employer’s legal responsibilities in offering 401k plans. This is because employers become fiduciaries when they sponsor plans. There are specific responsibilities and actions employers must take to be compliant with these regulations.
Due to these liabilities, risks, and costs, many employers would like to remove themselves from the responsibility of being a fiduciary to their employees’ retirement savings.
Antiquated technology. Much of the technology the 401k industry uses is shockingly outdated. This is worrisome. These behemoth systems create massive inefficiencies that result in high fees that are passed on to plan participants, which erodes their life savings. In addition, outdated technology makes the process of saving cumbersome and out-of-step with other consumer experiences. Today’s customers expect products to be easy to use, accessible, personalized, and fairly priced.
Fees, Fees, and More Fees. Today, high fees are costing people billions of dollars in lost savings. This is especially true for those who work for small to medium companies. Sadly, smaller companies pay much higher 401k fees because they don’t have the negotiating leverage of larger companies.
Technology is Changing the Landscape
The last decade has brought rapid innovation to banking, payment processing, and systems integration. These new technologies provide the components required to build an alternative retirement savings architecture to will serve the needs of the evolving workforce.
Beyond technology, there are other design and product features required for a modern retirement savings plan including: low (transparent) fees, high quality funds, universal accessibility, holistic financial education, and support with personal finances.
Icon. The modern retirement plan.
Built by industry experts in behavioral finance, technology, and design thinking, Icon is an entirely new approach.
Icon eliminates the regulations, costs, and risks for employers, and completely redefines the employer’s role. Icon is the simplest way to offer a retirement plan.
It gives people the freedom and flexibility to save in a low-cost, easy-to-use, tax-deferred savings plan. And, unlike a 401k plan, there are no limits on who can use it. Everyone qualifies: full-time, part-time, independent contractors, gig workers.
And for the millions who work for themselves, Icon can help them achieve financial security through a structured, self-directed, and flexible retirement savings plan.
Join us in our mission to improve financial security for all working Americans.
Published by: Laurie Rowley & Rich Binell