Despite crushing fee pressure in the retirement industry, opportunities still exist
PwC report also lists four recommendations for retirement industry stakeholders to remain relevant and kickstart growth.
The retirement industry is facing a decelerating revenue growth outlook, and structural challenges including fee pressure, underfunded retirement plans and an aging population are unlikely to ease.
In particular, rising industrywide fee pressure is constraining the profitability of U.S. retirement firms, with average 401(k) expense ratios falling by one-third over the past decade.
These findings are part of PwC’s recently released Retirement in America report. The report studies how societal, demographic and regulatory changes, as well as the pandemic, are impacting the industry’s current growth trajectory and consumers’ preparedness for retirement. In addition, the report explores the convergence between investment management, insurance and banking as the needs of retirement participants evolve.
The report noted fee pressure is not limited to asset managers, but extends into the recordkeeping space as well, with recordkeeping fees falling 8 percent from 2015 to 2019.
These pressures have resulted in both consolidation and cost reductions that have led to price competition as firms rely on drastic pricing action to attract new business, said the report
“Consolidation is one in several factors tied to persistent fee pressure,” said Bernadette Geis, PwC’s US Asset and Wealth Management Leader. “A net result has been market concentration (particularly for record keepers) and many retirement players prioritizing cost reduction initiatives ahead of innovation and growth.”
She noted new entrants that are agile and tech-based are entering the market, addressing areas incumbent firms have neglected and focusing on the customer experience.
Firms that focus on the evolving needs of participants by addressing individual challenges with new benefit offerings, such as debt repayment programs and decumulation strategies, can capitalize on an opportunity at a time when consolidation is impacting the industry while also positively impacting participation, said the report.
The small business market is another area of opportunity, with $5 trillion in potential retirement assets available to be unlocked through innovations such as pooled employer plans (PEPs).
“About 40 million individuals don’t have access to a private-sector employer plan mainly because many micro businesses haven’t been able to shoulder the costs of providing a plan,” said Geis. “With PEP/MEP plans, costs can now be shared across many employers. While we haven’t yet seen MEPs in the market at scale, there’s a need for asset managers, plan sponsors and record keepers to develop them in such a way so they’re cost efficient and easy to use.”
Geis also pointed to the potential for state-sponsored retirement savings plans, such as CalSavers and New Jersey Secure Choice, to gain scale in the coming years, offering an opening to sell different investment product options.
The report emphasized that the time to act on these trends is now, as evidence suggests the population is increasingly unprepared financially for retirement.
About 25 percent of Americans have no retirement savings at all, said the report, and only 36 percent feel that they are on track for retirement. Most who are saving are likely to come up short, PwC predicted. The median retirement savings account of $120,000 in the 55 to 64 age group would provide a retiree only $1,000 per month for a span of 15 years, said the report.
“The gap between retirement preparedness and retirement needs is large, and the lack of acknowledgement of this fact is striking,” said Geis. “The differences in retirement preparedness across race and income is also a crisis in this country.”
There is reason for optimism, however, said Geis. “The U.S. is arguably in better shape than many other countries while being mainly dependent on DC plans. Further, the cross industry nature (investment management, insurance, wellness) of how retirement is being handled and infusion of tech-first innovation provides reason to see participation and preparedness improve.”
Plan sponsors should consider offerings that serve potential participants’ near-term needs in order to prompt them to participate in long-term retirement plans, said the report.
For instance, with nearly half of young employees indicating they have no retirement savings at all, plan sponsors could focus on student loan paydown programs offered alongside a 401(k).
This type of arrangement could attract younger employees to the plan earlier than they might otherwise have joined and provide a bridge to full retirement savings participation as debt is reduced, said the report.
The report provided four recommendations for retirement ecosystem players to remain relevant and kickstart growth:
- adapt to changing participant needs around rising life expectancy and increasing health care costs
- diversify revenue sources beyond the DC plan space with multi-product cradle-to-grave benefits
- re-evaluate how the business is run by evaluating new technologies to increase efficiency
- digitize business and automating tasks to drive down expense
“For many individuals, the definition of retirement is changing — it’s not just about savings, it’s more about life planning,” said Geis. “We’re seeing the first generation retire that’s solely dependent on a DC plan. As such, there’s a need for retirement providers to offer a broader set of products. This could include pre- or post-retirement income, decuulation strategies or elder/childcare services to address the changing needs of individual participants.”
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.
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