As retirement plan providers grapple with ever-increasing fee pressure, they also contend with evolving expectations from plan sponsors and participants for better, faster, and more comprehensive service offerings.
Maintaining profitability while meeting these expectations will require firms to achieve economies of scale and prioritize technology initiatives, according to findings from The Cerulli Report—U.S. Retirement Markets 2019.
Providers must consider opportunities for growth—whether organically or through mergers/acquisitions—in addition to pursuing technological advancements that protect against cybersecurity threats, contribute to operational efficiency, and facilitate client engagement.
“These enhancements are essential to maintain a competitive edge,” Anastasia Krymkowski, associate director of retirement at Cerulli Associates, said in a statement. “Technology allows for more customization, facilitates in-plan retirement income, and can streamline and simplify the responsibilities of plan sponsors.”
Get big
Merger and acquisition (M&A) activity in the retirement space is often motivated by considerations of scale, attempting to bolster profit margins by spreading costs across a broader book of business.
M&A activity has continued in the recordkeeping space, as well as with asset managers, consultant intermediaries, and third-party administrators.
Cerulli asserts that current market dynamics favor an oligarchy of retirement plan providers, supported by estimates that the 10-largest recordkeepers will represent more than 75% of recordkept 401k assets by year-end 2019.
That said, acquisitions are only one approach to building out new capabilities; in other cases, strategic partnerships better align with firms’ objectives and respective strengths.
“Whether through acquisitions or strategic partnerships, retirement-focused firms that are lacking the capabilities to provide comprehensive financial guidance should consider their role in supporting plan sponsors and participants,” Krymkowski added. “They should also evaluate the potential to expand their purview into more holistic and higher-margin lines of business such as fiduciary services and managed accounts.”
Get smart
While investments in cybersecurity and other technological initiatives represent a major expense to retirement plan providers, Cerulli maintains that innovation—whether to payroll and recordkeeping infrastructure, customer-facing platforms, or data-driven portfolio management and financial advice—can create efficiencies, reduce long-term costs, and grant providers a competitive edge.
Digital solutions, like robo-advice platforms, have the potential to standardize recommendations, combat human biases, and alleviate some of the more time-intensive, computational aspects of portfolio management and financial planning—even if the resulting advice is still interpreted, communicated, and ultimately implemented by humans.
“Ultimately, firms that can deliver personalized and user-friendly solutions are well positioned for long-term success, not only in the landscape of employer-sponsored benefits, but also when it comes to maintaining individual wealth management relationships,” Krymkowski concluded. “Providers should partner with plan sponsors to understand employees’ financial circumstances and identify the most appropriate products and strategies—keeping in mind that defined contribution investments represent just one piece of the puzzle.”