Defined contribution (DC) retirement plans are a scale business. Some carriers have decided not to continue in administration or record-keeping due to the investment required to be a competitive player.
Plan providers must satisfy three constituencies: the brokers and consultants who help firms select DC plans and specify features, plan sponsors, and plan participants. The challenge for plan providers is to satisfy these constituencies in a market where they compete with asset management firms, banks, and other financial services players.
Brokers and consultants seek analytics-driven insights and assistance managing complex and lengthy sales processes. Plan sponsors pursue financial wellness for their employees while seeking assistance with Employee Retirement Income Security Act (ERISA) compliance, superior investment performance, and lower plan fees.
These financial wellness aims also include the analytics, reporting, and communications capabilities necessary to assess plan participation and contribution levels and encourage higher levels of both, where needed. Other industries, like retail, investment banking firms, and airlines, have set self-service and user experience expectations for plan participants.
Some employers are concerned that target date funds do not ensure employees’ lifetime income in retirement because traditional target date fund investments may not offer protection against inflation. Collective investment trusts (CITs) are close to overtaking target date funds within DC plans, becoming more transparent, reducing or eliminating investment minimums, and moving down-market to smaller plans.
Environmental, social, and governance (ESG) investing is growing in popularity, though the number of plans offering such investments and uptake to date has been limited. Employers are exploring providing their employees with the ability to direct their contributions toward emergency savings funds, health savings accounts (HSAs), or student loans. Employers are also addressing their employees’ overall financial wellness as part of their DC retirement plan strategies, whether through offering access to personalized advice or digital budgeting and related solutions.
The Impact of COVID-19
Plan sponsors, especially larger plan sponsors, have focused on offering additional participant services, education, and increased communications for plan participants. Considering employees’ overall financial wellness beyond retirement is a growing trend.
On the participant side, there is a continuing increase in early retirements or employees quitting their jobs, the so-called Great Resignation. Many plan participants withdrew funds from their IRAs and 401(k) plans and plan to save more or postpone retirement and work longer.
Younger baby boomers taking early retirement could create new and different retention and investment opportunities for plan sponsors and asset managers. It could also create new opportunities for savvy investment managers as plan participants consolidate assets from multiple DC retirement plans accumulated over their working lives.
Increased Fraud and Cybersecurity Actions
Another consequence of the pandemic, or at least from the growth in remote work, is an increase in retirement account fraud. Record-keepers have been staffing up their cybersecurity functions and expect to continue to do so. The Department of Labor has issued cybersecurity guidelines for plan fiduciaries, plan participants, and record-keepers and has begun conducting retirement plan cybersecurity audits.
The Society of Professional Asset-Managers and Record Keepers (SPARK) Institute has expanded on these guidelines to recommend a minimum set of controls for plan fiduciaries, plan participants, plan sponsors, and record-keepers, including account authentication, contact data for security-related communications, customer reimbursement, establishing and re-establishing account access, and fraud surveillance.
Increased Debt and Retirement Savings
Credit card debt is heading toward a record high, as is total household debt, including auto loans, mortgages, and student loans. The increase in credit card debt is partly due to consumers’ delaying paying off higher-priced items and the growth of e-commerce during the pandemic. The Federal Reserve will be raising interest rates, which will only grow credit card debt.
These developments make measures such as the proposed SECURE ACT 2.0’s provision for enabling the tying of employer matching contributions to student loans critical to a new generation of workers.
The proposed House SECURE 2.0 Act would automatically enroll eligible employees in 401(k), 403(b), and SIMPLE plans. In addition, it would enable 403(b) plans to invest in CITs and participate in multiple employer plans and establish a national database of lost retirement accounts. The act would also increase the age for required minimum distributions and remove investment caps on qualifying longevity annuity contracts, among other provisions.
Senators on the Senate Committee on Health, Education, Labor, and Pensions have introduced the “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act,” or RISE & SHINE Act. The U.S. Senate Committee on Finance is also expected to introduce legislation, with the two bills forming the basis of the Senate’s SECURE 2.0 Act.
Proposed Treasury regulations regarding required minimum distributions for qualified retirement plans and IRAs are complex, requiring financial advisors and plan sponsors to educate plan participants and account holders.
Fintech and Insuretech
Aite-Novarica Group has found in discussions with insurers that they are willing to investigate ways to work with fintech and insuretech firms. Still, it is challenging for them to find startups with platforms that can provide experiences and support for different plan types.
Most insurers are investing in insuretech firms that focus on retirement and retirement planning instead of acquiring them (as MassMutual acquired Blueprint Income), licensing their solutions, or partnering with them.
Some fintech and insuretech firms may compete with insurers as plan providers. For more on fintech and insuretech firms in the retirement services space, see our report Insuretech Spotlight: Retirement Services.
DC retirement plan providers continue to invest most heavily in case installation, distribution, customer engagement, and plan design to a lesser extent. Onboarding requires investments in digital capabilities, data and analytics, and core systems. Portal initiatives and communications continue to be vital.
A focus on participant financial wellness across the board requires effective communications, reporting, and analytics. Plan sponsors are prioritizing improvements to participant contact center service and educational offerings.
If you’d like to discuss our key findings in the DC retirement plan space, please read our new report Business and Technology Trends, 2022: Defined Contribution Retirement Plans or contact Nancy Casbarro ([email protected]), John Keddy ([email protected]), or me ([email protected]) to continue the conversation.