The retirement benefits industry is facing slower revenue growth and structural challenges such as fee pressures, underfunded retirement plans, and an aging population are unlikely to improve.
In particular, increasing industry-wide fee pressure is limiting the profitability of US annuity companies. The average expense ratios of 401 (k) have decreased by a third over the past decade.
These findings are part of PwC’s recently published report on Retirement in America. The report examines how societal, demographic and regulatory changes as well as the pandemic are affecting the current growth trajectory of the industry and consumer willingness to retire. The report also examines the convergence between investment management, insurance and banking as retirees’ needs change.
The report found that fee printing is not just limited to asset managers, but extends to the field of record as well. Recording fees fell 8 percent from 2015 to 2019.
These pressures have resulted in both consolidation and cost reductions that have resulted in price competition as companies rely on drastic pricing measures to attract new businesses, the report said
“Consolidation is one of several factors associated with ongoing fee pressures,” said Bernadette Geis, PwC’s US director of wealth and assets. “A net result has been market concentration (especially for record holders) and many retirees prioritizing cost-cutting initiatives over innovation and growth.”
She found that new entrants who are agile and technology-based are entering the market, addressing areas that incumbents have neglected, and focusing on the customer experience.
Companies that focus on attending attendees’ changing needs with new service offerings like debt settlement programs and decumulation strategies by addressing individual challenges can seize an opportunity at a time when consolidation is affecting the industry while benefiting participation the report says.
The small business market is another area where $ 5 trillion of potential retirement assets are available that can be unlocked through innovations like Pooled Employer Plans (PEPs).
“About 40 million people do not have access to a private employer plan, mainly because many micro-businesses could not afford the cost of providing a plan,” Geis said. “With PEP / MEP plans, the costs can now be shared among many employers. While we haven’t seen a large scale MEP in the market, asset managers, plan sponsors, and note takers need to develop them to be cost effective and easy to use. “
Geis also pointed to the potential of government sponsored retirement plans such as CalSavers and New Jersey Secure Choice to grow in size in the years to come, and offered the opportunity to sell various options for investment products.
The report stressed that now is the time to respond to these trends as there is evidence that the population is increasingly unprepared for retirement.
About 25 percent of Americans have no retirement savings at all, the report says, and only 36 percent feel well on their way to retirement. Most of those who save are likely to run out, PwC predicted. The $ 120,000 median retirement balance in the 55-64 age bracket would only provide a retiree with just $ 1,000 per month for a 15-year period, the report said.
“The gap between old-age provision and retirement needs is wide, and the lack of recognition of this fact is striking,” said Geis. “The racial and income disparities in retirement provision are a crisis in this country too.”
However, there is reason to be optimistic, said Geis. “The US is arguably in better shape than many other countries while largely depending on DC plans. In addition, the cross-sector nature (investment management, insurance, wellness) in the treatment of retirement and the introduction of tech-first innovations provides an opportunity to improve participation and readiness. “
Plan sponsors should consider offers that meet the short-term needs of potential participants in order to encourage them to participate in long-term retirement plans, the report said.
For example, since nearly half of young workers say they have no retirement plans at all, plan sponsors could focus on the student loan amortization programs offered alongside a 401 (k).
This type of arrangement could attract younger employees to the plan sooner than usual and build a bridge to full participation in retirement savings when debt is reduced, the report said.
The report made four recommendations for retirement ecosystem actors to stay relevant and fuel growth:
- Adaptation to changing needs of the participants due to increasing life expectancy and increasing health care costs
- Diversification of sources of income beyond the DC plan space with benefits for multiple products from cradle to grave
- Re-evaluate senior management by evaluating new technology to increase efficiency
- Digitize business and automation tasks to reduce costs
“For many people, the definition of retirement is changing – it’s not just about savings, but more about life planning,” said Geis. “We’re seeing the first generation retiring, which depends entirely on a DC plan. For this reason, pension providers need to offer a wider range of products. This could include pre- or post-retirement income, decalcification strategies, or aged / childcare services to meet the changing needs of each participant. “
Kristen Beckman is a freelance writer based in Colorado. She was previously the author and editor of ALM Retirement Advisor magazine and the LifeHealthPro online channel. She was also a reporter for Business Insurance Magazine, which covered issues related to compensation for employees.