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Small business owners are redefining the market for 401(k) plans. Result: Mass market “products” are about to go extinct.

Greg Carpenter

January 26, 2023


Wealth equals choice. Choice is the ultimate power and the reason people pursue wealth in the first place. The ability to choose among many good options is the key to building an attractive lifestyle. Wealthy people are loathe to trade away choice unless very well compensated. That’s a common observation across all markets and professions.

The market for 401(k) plans is no different. Over the last decade, technology changes have brought more choice to business owners. Investment options have multiplied with the advent of target date funds, ETFs, and low-cost index funds. The emphasis on lower fees have also opened up the market to greater competition from firms that offer low-cost services. More competition has led to more choice for plan sponsors.

This proliferation of choice is exploding the conventional mass market for 401(k) plans. The behemoths of Wall Street have been slow to react to the changes. The large financial firms still offer mass market “products” that are easy to sell and easy to service, but severely restrict choice. They are hamstrung by their own business models. They lead with their higher-cost actively managed investments and bundle in other services. Any attempt to introduce greater choice can threaten margins.

One exception has been Charles Schwab. Schwab launched an “all-index” 401(k) plan. Margins are lower (possibly a lot lower). No white hat here, though. They hope to make up lost margins on cross-sold business.

How small business 401(k) plans are reshaping the market

I’m often asked how Employee Fiduciary can consistently win business from the big financial firms. My answer is always the same:

  1. We market to wealthy people.
  2. Wealthy people prefer choice.
  3. We offer more choice at the lowest possible price.

Let me unpack that a bit. Our clients are small business owners – entrepreneurs and other successful professionals. They have achieved a certain level of success in their business and have built or are building wealth. Our clients reject the mass market products because they value choice over other factors. Our clients are typical small businesses, not outliers. They are not rebels or necessarily early adopters.

Market changes are being driven by small businesses because small business owners are generally wealthy and are making buying decisions based on their own personal preferences - and there are a lot of them. They are accustomed to making complex purchasing decisions and, as a group, are much more dynamic in making financial decisions. Collectively, these entrepreneur-driven companies are reshaping the 401(k) market. Literally, tens of thousands of small business owners are putting their personal preference for choice first and foremost when choosing a 401(k) provider.

Conversely, larger companies often have competing needs when selecting a 401(k) provider and often are slower to make changes. Ease of administration may be a driving factor for many organizations where a professional HR manager may be tasked with implementing the 401k plan. In these organizations, the company values ease of use and may be more willing to accept less choice and potentially higher costs in order to meet organizational goals. The mass market approach offers a type of professional security blanket for the managers. As the old adage goes: “No one ever got fired for buying IBM.”

Want to put my analysis to the test? Think how your organization hired its 401k provider. Who made the decision? What factors were most important – choice, ease of use, or the IBM argument? Would your organization make the same choice today?

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