Defined contribution plans in the U.S. have been a raging success and are the envy of the world with $12.2 trillion in assets and $16.8 trillion in IRAs, which are fueled by 401(k) and 403(b) plans at the end of the first quarter of 2025, according to the latest ICI report, while increasing access to more workers and their families as new formation explodes.
The DC system is a conundrum—small to midsize and even some larger employers with plans are run by unsophisticated human resources, benefits and finance staff with little to no training, juggling many responsibilities, making buying decisions on behalf of employees who are even less sophisticated. To make matters worse, these employers mostly shift costs to participants, and while they can never outsource all fiduciary liability, there are many opportunities to mitigate risk.
There were and are fewer issues with defined benefits plans because plan sponsors pay expenses out of pocket and have the liability if there is not enough money in the plan to fund retirement, both of which have been shifted to unsophisticated DC participants.
No one can blame providers, mostly not fiduciaries, for trying to maximize profits or even advisory firms that are fiduciaries. But the DC system is fraught with danger, leaving the retirement plan advisor to be the advocate for clients, even as providers who rely on them for distribution try to incentivize and co-opt them. Maybe that is why the U.S. retirement system ranked 29 out of 48 countries, according to the Mercer CFA Institute.
Advisors are the critical lynchpin in the DC system.
Look at the abuses being uncovered when there is no independent fiduciary advisor in the group plan world, which is booming, where Pentegra just settled for $48.5 million after a $39 million jury verdict, and TIAA was hit with a $93 million fine from the SEC and a recent class action lawsuit. A good advisor or consultant would have helped.
Co-fiduciary status provides some protection while the DOL investigates abuses. Though some 401(k) defenders think all ERISA litigation is bad, it has made a significant impact, forcing plan sponsors and providers to change practices and be more vigilant.
But litigation is tedious and may not significantly benefit the participants in that plan financially. The DOL, like many agencies, has fewer resources during the Trump administration. Fiduciary status alone does not provide the needed protection—like all laws, they can be manipulated and circumvented.
Beyond fees, funds, fiduciary and even financial wellness, what does it take to be a great advisor? Clearly the answer is courage.
The courage beyond the best interest standard advocated by the SEC or disclosure favored by the DOL. The courage to tell clients what they do not want to hear but need to, which could jeopardize the engagement. Courage to do something that could affect advisor fees and maybe even limit opportunities, like firing clients that do not fit their model, or are unwilling to do what is right for employees. The courage to be thoughtful about adding private markets and retirement income, even as momentum and pressure build.
Which raises the existential question of why advisors do what they do, or their mission statement—to help people or make money? While not mutually exclusive, which comes first and which trumps the other when difficult decisions need to be made?
Getting support from good providers is fine if disclosed, but not from those whose products are lacking, or services are not relevant. Pushing back on home offices that also get support, advocating for or even limiting providers and services.
Exploring shortcomings and conflicts within the DC system, which is a raging success, raises the hackles of some defenders and fanboys, but is needed to go from good to great, just as courage by advisors does the same.
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