Retirement in America

Time to rethink and retool

A range of factors have put intensifying pressures on the US retirement system in recent years, leaving the industry facing a decelerating revenue growth outlook. A number of these challenges, such as fee pressure, underfunded retirement plans and an aging population, are structural and unlikely to ease.

Many retirement players have been unable to outrun even one of these factors: fee pressure. Rising industry-wide fee pressure is placing constraints on the profitability of US retirement firms, with average 401(k) expense ratios falling by a third over the last ten years. The fee pressure phenomenon is not limited to asset managers: According to PwC analysis, recordkeeping fees are also on a downward trajectory, declining by 8% between 2015 and 2019 alone.

While these pressures have forced some retirement firms to consolidate or exit, there’s an opportunity hiding in plain sight. Firms that focus on the evolving needs of participants by addressing individual challenges with new benefit offerings and holistic advice can increase participation. Access to retirement programs can also improve through lower cost turnkey programs specifically designed for small business, which, in total, we estimate can unlock an additional $5 trillion in retirement assets.

The call to action is now. There are too many signs suggesting the population is unprepared. A quarter of US adults have no retirement savings and only 36% feel their retirement planning is on track. Even for those who are saving, many will likely come up short. We estimate the median retirement savings account of $120,000 for those approaching retirement (age cohort 55 to 64) will likely provide less than $1,000 per month over a 15-year retirement span. That’s hardly enough, even without factoring in rising life expectancies and increasing healthcare costs.

Where the industry stands today

In response to these challenges, retirement firms are matching fee pressure with cost reductions, with several firms opting to consolidate. However, continuous consolidation has further reinforced price competition, with some firms relying on drastic price modifications to attract new business.

While thin margins are a threat for the entire industry, smaller firms face even greater headwinds. The ability to excel in today’s environment is closely tied to the extent to which firms can generate scale for distribution, innovate with new technologies and expand benefit offerings to help address gaps in the market—such as a need for supplemental lifetime income. Consolidation has been one approach that helps generates efficiencies needed to reinvest around these opportunities. 

Still, the significant constraint on profitability restricts how institutions can adapt. Firms that are unable to challenge their status quo are likely to find it harder to gain market share, and face eroding competitive differentiation as their offerings become commoditized. 

For firms both large and small, the challenges are widespread. How can firms sidestep financial pressures to reinvest for growth? How can they reframe the experience or innovate to foster higher levels of plan participation?

A call to action

The retirement ecosystem—investment managers, record keepers, platform providers and institutional consultants that serve plan sponsors—recognize that endless cost reductions will likely hamper long-term growth objectives. But given the industry-wide pressures, it’s important to separate actions that are in your control from structural problems that are not. For example, fee pressure will likely continue to challenge the revenue pool, but the ability to meet changing participant needs with new financial and wellness products or expand plan access with instruments such as pooled employer plans (PEP) can help meet some of today’s challenges.

Other opportunities exist within your participant coverage. Our research suggests a 17-point gap between access and participation rates for defined contribution plans—three-and-a-half times that of a defined benefit plan. Competing priorities and the lack of financial wellness programs or advice tends to have a direct impact on whether employees forgo participation.

Four paths to success

Adapt to changing participant needs

Social inflationary trends such as rising life expectancies and the changing goals of participants dictate that retirement firms will likely need to offer new products and services in new ways in order to find and meet the differing needs of participants. New benefit offerings such as debt repayment programs or decumulation strategies, and new access points such as PEP plans will likely be key factors in engaging with new participants earlier, expanding the addressable market by increasing access and growing the overall pie of retiree assets.

What matters

According to estimates, just 36% of the US workforce thinks their retirement savings plan is on track. Combined with rising life expectancy and increasing healthcare costs, this inevitably calls into question the preparedness of US households for retirement. 

The list of pressures isn’t limited to individuals. Sustained fee pressure will likely lead to slower revenue growth over the next five years. This could make it even more complicated for the industry to address a growing retirement savings gap.

The upshot: For firms that adapt, there’s room to grow. Firms that can successfully adjust to the changing needs of retirement plan participants with new offerings can carve out space for growth in an increasingly contested and commoditized marketplace. For example, offering new benefit options such as debt repayment programs or decumulation strategies of expanding market access with new small market PEP plans could have a direct impact on providing access to retirement planning and participation rates—which we estimate could unlock an additional $5 trillion in retirement assets.

Why now

The US market is more dependent than ever on defined contribution plans (DC). In fact, over 60% of total US retirement assets are now held in such plans, representing a wide-scale shift in investment risk from the corporate sector toward employees.

Yet needs remain unmet. As we start to see the first generation retire solely on an employee-managed DC plan, the need for higher levels of supplemental retirement income is on the rise. Our research shows the median retirement account balance for those approaching retirement would likely generate less than $1,000 per month over a 15-year retirement span. That’s hardly enough for individuals whose financial security is dependent on these savings, not to mention a participant base that is living longer. 

The need for broader types of benefit offerings such as debt paydown, supplemental income and managed advice is on the rise. In addition to addressing a potential savings gap, retirement paths are more diverse than in the past: Some people want to retire earlier, others plan to work reduced hours and still others want to continue working but in new endeavors. 

Plan sponsors should also look toward new approaches to help increase plan participation. In the US alone, about half the workforce, about 63 million individuals, do not have access to or participate in an employer-sponsored retirement program. We believe state-sponsored retirement savings programs such as CalSavers and New Jersey Secure Choice could gain scale in the coming years and provide a pathway for financial providers to offer investment product options. Alternatively, pooled employer plans (PEP) present an opportunity for retirement firms to work directly with small and mid-size companies to help increase retirement participation.  

Now more than ever, firms need to provide different retirement vehicles for different retirement paths to reaccelerate their growth trajectory.

Steps to take

Expand the benefit offering

The longer the road to retirement, the more difficult it is to enroll and retain plan participants. For example, 42% of individuals between 18 and 29 have no retirement savings versus 13% of those over 60. Providers can help younger participants get on the road early and stay the course by understanding the reasons for non-participation and expanding benefits to better serve more diverse needs. 

To attract and retain participants throughout their careers, we recommend that plan providers add offerings that serve their near-term needs as well as their ultimate retirement goals. Offering a student loan paydown program alongside a 401(k), for instance, might prompt younger workers to enroll earlier than they otherwise would have and, at the same time, help provide a bridge to full retirement savings participation as debt is reduced. 

Providers might also consider adding new financial wellness modules that extend beyond just education to include advisor-led or digital advice. Throughout the pandemic, we’ve seen wide adoption of virtual advice models. Among other benefits, the technology-driven shift provides plan participants with a larger pool of advisors to choose from and can potentially lower fees due to the reduction in displacement costs, which can help increase participation. For service providers, remote advice has the potential to help increase opportunities for sales, which could help relieve margin pressure.

By meeting different participant needs or rethinking advice approaches, providers can make sure that their efforts to engage earlier and expand wellness programs produce results.

Adapt product offerings

Plan sponsors should also adapt their product offerings to meet the differing needs of participants in effort to help increase participation and increase access.  

First, plan providers can tap the fast-emerging ranks of DC plan-only retirees by expanding their retirement income options. For example, guaranteed income, through in-plan annuities and other options, can play a big role to combat social inflationary trends. Incorporating annuities into a common DC plan could help remove the negative connotation of the product and extend retirement spending power alongside rising life expectancy. 

In any case, a diverse set of product offerings is probably key in addressing new and varying needs of participants. In PwC’s 2020 Financial Wellness Survey, 56% of surveyed baby boomers told us they would continue to work after retirement either out of willingness or due to financial necessity—far higher than previous generations. Plan providers that have decumulation strategies and alpha-oriented products will be better positioned to be more engaged and meet the needs of these future retirees while keeping assets in plan. 

Second, look to the underserved small business market. About 40 million individuals don’t have access to an employer-sponsored plan, largely due to the cost burden for a small business to offer a plan or the unique needs of self-employed individuals. With the Secure Act of 2019 allowing unrelated employers to create a single plan, known as an MEP, costs are shared—unlocking a new growth opportunity. According to a Transamerica Center for Retirement Studies survey, 29% of companies that don’t offer DC plans would consider an MEP if the costs were reasonable.

Reframe the participant experience

To foster higher levels of participant retention, we believe retirement players should consider ways to build greater convenience and personalization into their offerings. According to our 2018 Future of CX survey, positive experiences influence decision-making the most in healthcare and financial services—two cornerstone industries for retirement. 

Plan providers can enhance convenience and make retirement planning less onerous for their participants by integrating tools into their daily routines. Simple steps such as mapping an individual’s retirement plan to routine check-ins and measurements can help anticipate needs and make the experience more personal.  

When it comes to experience, our CX survey indicates that consumers value efficiency and convenience more than any other factors. Plan providers that focus on participant experience can help meet what participants value while improving retention and engagement.

Diversify revenue sources

Retirement planning is evolving into an ecosystem of benefits that cross financial planning, health, wellness and financial literacy. Firms that can extend beyond the current playing field — which is typically limited to the defined contribution plan — can be more effective at retaining assets over time. Multi-product, cradle to-grave benefit offerings allow consumers to find and adopt different products as their needs evolve.

Reevaluate your operating model

Firms that participate in retirement plans are conducting a careful reevaluation of where and how they participate given industry consolidation and product commoditization. For example, record keeping — typically a higher cost function given what are often legacy, aging systems — has been upended by lower cost technology and industry concentration. For sub-scale participants to remain competitive, they should determine where to participate and how to scale in a cost-effective manner. 

More on insight reevaluating your operating model to come soon.

Digitize your business

To be competitive in tomorrow’s retirement industry, record keepers and platform providers must be able to streamline their operations in order to differentiate with effective customer engagement. With advancements in technologies, there are more opportunities to automate tasks and lower maintenance costs to drive down expenses while freeing up reinvestment in order to deliver more beneficial participant experiences. 

More on insight digitizing your business to come soon.

Contact us

Bernadette Geis

Bernadette Geis

Asset and Wealth Management Trust Solutions Leader, PwC US

Jay Kaduson

Jay Kaduson

Principal, Lead Client Partner, PwC US

Michael VanDemark

Michael VanDemark

Asset and Wealth Management Advisory Leader, PwC US

Juneen Belknap

Juneen Belknap

Principal, Transformation, PwC US

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