Amid ever-increasing fee pressure and evolving expectations from plan sponsors, a new report warns that retirement plan providers must be prepared to consider economies of scale and to prioritize technology initiatives in order to maintain profitability.
According to findings from “The Cerulli Report—U.S. Retirement Markets 2019: Looking Toward Holistic Solutions for Participants and Plan Sponsors,” providers must consider opportunities for growth – whether organically or through mergers and 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,” explains Anastasia Krymkowski, associate director of retirement at Cerulli Associates. “Technology allows for more customization, facilitates in-plan retirement income, and can streamline and simplify the responsibilities of plan sponsors.”
Motivated by considerations of scale, M&A activity has continued in the recordkeeping space, as well as with asset managers, consultant intermediaries and third-party administrators, the report notes. According to Cerulli, current market dynamics favor an oligarchy of retirement plan providers, with estimates showing that the 10 largest recordkeepers will represent more than 75% of recordkept 401(k) assets by year-end 2019. That said, Cerulli emphasizes that acquisitions are only one approach to building out new capabilities; in other cases, strategic partnerships better align with firms’ objectives and 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 observes. “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,” she adds.
Technology
Cerulli further emphasizes that technological innovation – whether to 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.
“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 explains. “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.”
Moving Upmarket
While mid-market consultants have established a niche in the $25 million to $250 million plan size range, Cerulli further observes a trend of these retirement “aggregators” moving upmarket. Given ongoing consolidation in this space, aggregators are building scale and evolving to service larger plan sponsors, the report notes. Moreover, with an emphasis on lowering plan costs and providing open-architecture investment menus, the firm notes that some midmarket consulting firms are also using collective investment trusts (CITs) to develop their own white-labeled products.
Fee Sensitivity
Meanwhile, even though reducing plan administration and investment management cost is still a relevant concern, particularly in the mega plan segment, Cerulli notes this does not register as a top priority for plan sponsors. That said, the report advises that one should not assume that fees are insignificant. “On the contrary, in the current environment of heightened fiduciary awareness (with corresponding demand for cost efficiency and increased transparency), fees are subject to intense scrutiny,” the report states.
Drawing on that finding, Cerulli speculates that many plan sponsors have already negotiated more attractive recordkeeping and administrative fee arrangements or reevaluated plan investment menus. As such, implementing further changes may not be a primary focus, even as plan sponsors and their advisors “keep a close eye on cost,” the report notes.
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