Several factors are placing pressures on the U.S. retirement system, leaving the industry facing a decelerating revenue growth outlook, but a new report suggests there are “opportunities hiding in plain sight.”
Rising industry-wide fee pressure is one area placing constraints on the profitability of U.S. retirement firms, with average 401(k) expense ratios falling by a third over the last 10 years, according to PwC’s “Retirement in America: Time to Rethink and Retool” report, which is based on research conducted by the firm’s Market Research Center. And this phenomenon is not just limited to asset managers. According to the PwC analysis, recordkeeping fees are also on a downward trajectory, declining by 8% between 2015 and 2019 alone.
In response to these challenges and others, the report explains how retirement firms are matching fee pressure with cost reductions, while several firms have opted to consolidate. Yet, continuous consolidation has further reinforced price competition, with some firms relying on “drastic price modifications” to attract new business. And while thin margins are a threat for the entire industry, smaller firms face even greater headwinds, the report further observes.
A Call to Action
PwC notes, however, that firms that focus on the evolving needs of participants by addressing individual challenges with new benefit offerings and holistic advice can increase participation.
Moreover, improving access to retirement programs through lower cost turnkey programs specifically designed for small business can unlock an additional $5 trillion in retirement assets, according to the firm’s estimates. “The ability to excel in today’s environment is closely tied to the extent to which firms can generate scale for distribution, innovate with new technologies and expand benefit offerings to help address gaps in the market,” PwC emphasizes.
What’s more, the PwC researchers note that a quarter of U.S. adults have no retirement savings and only 36% feel their retirement planning is on track. Even many of those who are saving are likely come up short, according to the research, which estimates the median retirement savings account of $120,000 for those approaching retirement (age cohort 55 to 64) will likely provide less than $1,000 per month over a 15-year retirement span.
Stick with What You Can Control
Given the industry-wide pressures, PwC emphasizes that it is important to separate actions that are in your control from structural problems that are not. “For example, fee pressure will likely continue to challenge the revenue pool but the ability to meet changing participant needs with new financial and wellness products or expand plan access with instruments such as pooled employer plans (PEP) can help meet some of today’s challenges,” the report explains.
Additionally, there may be opportunities that currently exist within a plan’s participant coverage. To that end, the research suggests there is a 17-point gap between access and participation rates for defined contribution plans—3.5 times that of a defined benefit plan. “Competing priorities and the lack of financial wellness programs or advice tends to have a direct impact on whether employees forgo participation,” the report submits.
As for how firms can overcome the challenges and “kick-start growth,” the report offers four paths:
1. Adapt to changing participant needs: Given trends such as rising life expectancies and the changing goals and needs of participants, PwC suggests that new benefit offerings such as debt repayment programs, decumulation strategies and new access points, such as PEP plans, will likely be key factors in engaging with new participants, expanding the addressable market and growing the “overall pie” of retiree assets.
2. Diversify revenue sources: Retirement planning is evolving into an “ecosystem of benefits” that cross financial planning, health, wellness and financial literacy, PwC observes. As such, firms that can extend beyond the current playing field—typically limited to the DC plan—can be more effective at retaining assets. “Multi-product, cradle-to-grave benefit offerings allow consumers to find and adopt different products as their needs evolve,” the report advises.
3. Reevaluate how you run your business: With industry consolidation and product commoditization, firms that participate in retirement plans are conducting a “careful reevaluation” of where and how they participate. PwC notes, for example, that recordkeeping—typically a higher cost function given what are often legacy, aging systems—has been upended by lower cost technology and industry concentration. For sub-scale firms to remain competitive, they should determine where to participate and how to scale in a cost-effective manner, the report suggests.
4. Digitize your business: To remain competitive, recordkeepers and platform providers must be able to streamline their operations. Given advancements in technologies, PwC notes that there are more opportunities to automate tasks and lower maintenance costs to drive down expenses, while freeing up reinvestment to deliver more beneficial participant experiences.
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