As the world’s largest retirement market, current trends in the U.S. will have a disproportionate impact on leading financial services firms over the next two decades, says a new report.
While noting that retirement “is and will continue to be” one of the largest growth opportunities for wealth managers, insurers and asset managers, McKinsey & Company’s “Long-term value creation in U.S. retirement” lays out the disruptive trends, future scenarios and strategic options the industry faces over the coming years.
Recent estimates by the McKinsey Global Institute show retiring and elderly individuals in the developed world will contribute more to global consumption growth through 2030 than will Chinese consumers aged 15 to 59.
The largest retirement market is in the U.S., where $26 trillion in assets are held in retirement-related accounts, including public and private DC and DB plans, IRAs and annuities, the report notes. What’s more, these accounts collectively support more than $430 billion in revenue for retirement recordkeepers, asset managers, wealth managers, annuity writers and life insurers.
Not surprisingly, leading firms from across the financial services industries are seeking to tap into this long-term growth opportunity. And while the DC market remains large and attractive, it is also experiencing a series of disruptions, the report notes. Asset managers are facing multiple disruptions at once, including:
- the rotation to passive driven by fiduciary considerations;
- relentless pricing pressure across active and passive, also driven by fiduciary concerns; and
- the rise of target date funds as the Qualified Default Investment Alternative.
What’s more, the report notes that continued unbundling of asset management and recordkeeping will intensify concerns about the business models of more integrated players. “For the myriad of managers on the outside looking in, developing a viable DC strategy is essential to sustainable growth in the space,” according to authors Alex D’Amico, Jonathan Godsall and Jimmy Zhao.
As to how the industry will evolve over the next 10 years, the authors explain that they see three potential scenarios. The first presumes continuing consolidation but little disruption. They explain that, under this scenario, the industry sees continued consolidation and further pricing pressure as incumbents battle for share and offer pricing concessions to retain business with high proprietary share. Over time, however, marginal players gradually exit as they reach their specific inflection points, with the end state featuring clusters of four to five at-scale providers at a segment level.
Meanwhile, the second and third scenarios see disruption from outside the DC market. The second scenario entails external disruption from digital attackers in retirement, while the third could come from another market, such as the human resources information systems industry, which could be a long-term threat given the access it has to employee payroll and census data fees.
“While many HRIS providers have modules that accommodate defined contribution enrollment today, the modules often lack high-quality decision support tools provided by leading plan providers,” the report states. That said, should they choose to do so, however, HRIS providers could substantially upgrade their offerings and disintermediate recordkeepers, the authors further observe.
“The common implication across all three is that recordkeepers need to act boldly to secure their futures through a combination of aggressive restructuring to prepare for continued revenue pressures while investing in next-generation client, participant and sponsor experience capabilities to meet rising customer expectations,” the report surmises.