Conni and I have lurked in the netherworld of retirement plan administration for decades now, working on those things nobody ever sees. One of the ways we explain what we do to friends and family is with a story about their own 401(k) and 403(b) plans. What we tell them is that when they go to their plan’s website to make a trade between two different mutual funds, it may be to them that its just a matter of making a couple of mouse-clicks, and the deal is done. But what really happens behind the scenes is those “clicks” typically trigger the execution of a half dozen or so different (and usually complex) contracts, often between just as many parties. These involve a series of complicated (yet taken for granted) data movements and cash movements in hopefully a a timely manner which results (usually) in your account balance showing the properly executed trade the next day.
I refer to these sorts of arrangements, along with all sorts of others, as Plan Infrastructure. Plan Infrastructure often involves serious matters of intellectual property, as well as marrying technical software rules with the seriously intricate technical details of retirement plan administration. A programmer put it all in perspective for me once, as he explained to me that computers are actually just stupid machines. They ultimately just consist of a string of electronic switches where someone, somewhere still has had to decide which electronic switch to turn on or off and when……which is often where we get involved.
What is particularly striking in the past couple of years or so is the attention we have had to pay to the growing use of “API” arrangements (or “application programming interfaces”) in the retirement plan space. API is fast becoming a major tool in plan administration, as technology demands that computers talk to each other in much more efficient ways. Think about it. Each computer program, and machine, has its own electronic and data protocols upon which it relies, and which was designed for their own organization’s purposes and needs. It takes a very serious effort for programs and machines of unrelated companies (and, indeed, often within the same business!) to coordinate these individually designed protocols when trying to work with another. APIs accommodate this effort.
What this growing “API” world is running into is what I consider a hallmark in plan administration software, particularly in larger, established financial organizations. That is what I refer to systems “calcification.”An organization’s systems have often been been used for decades, with the same software, often the same hardware, which all carry with it very strong inertia-driven legacy system issues. We used to joke that whenever a programming issue came up in a retirement system, the typically answer from the programmers tasked with the change was either “no” or “a million dollars and a year.” I have always been taken aback by the notion that we can buy a hamburger and a coke with a credit card, which shows up quickly in your electronic account; yet retirement organizations continue to struggle with providing this sort of data expertise in basic plan administration (where, arguably, the stakes are substantially higher than a purchase of a hamburger…).
Even beyond API, there seems to be a growing number of tools which may finally be giving vendors a chance to thrive in what has largely been a legacy driven retirement technology market. Making these sorts of technology accommodations is not easy, and there will be many firms which will not be able to compete over time. A number of recent legislative initiatives, in particular, really contemplate advanced technology which makes technology expertise all the more critical for service providers. For example, just consider SECURE Act’s PEPs or Groups of Plans, or portability of lifetime income options, or the distribution of 403(b) annuity contracts. Each of these initiatives demand enhanced technology and are intensely technology reliant. I do suspect that there will be at least a few tiers of service providers as the near future approaches, those who successfully adapt to technology, and those who don’t. And it will show up in all the work that the retirement professional professionals of all stripes do on a daily basis.