Several different levels of diversification…
The lowest level of diversification possible is where everyone is forced to be part of the same system managed by a small group of people. Participants have no direct say how decisions are made. If it goes down, there is economic collapse.
The second lowest level of diversification is where a large percentage of people are invested in one giant pool, with little yo no say in what gets invested, and very limited options regarding what their money gets invested into. This is very common in traditional pension systems. If that fund is poorly invested everyone who participates is screwed.
The next level of diversification (which is practically impossible under current law) is where everyone in a country invests into the same fund. The fund is very diversified. But ignore this, because it won’t happen.
The final level of diversification is every person is able to make decisions regarding their accounts. Ideally each person has some very basic knowledge of economic and investing (or a qualified economist who is either a fiduciary or personally vested in that person’s economic well being, let’s say, a child or grandchild) and they have a large array of funds to choose from which are offered by a wide variety of companies. Each person chooses a mixed portfolio of multiple index funds which are managed by multiple firms. If one of those firms goes down, don’t sweat. If one of those funds goes down, you might not even notice. As long as the ROI stays high for the economy, you’ll be fine. No one person is overly exposed to the risk of any one asset and that means that society will function and society will be able to take care of the small number of people who do poorly.
That’s how diversification works.