“The general story in this industry has been that fee compression hit recordkeepers first, then the investment managers, with the move to passive funds and exchange-traded funds. Now, the trend is hitting advisers,” said Patrick Murphy, CEO of John Hancock Retirement, over two years ago. It’s safe to say that fee compression to stakeholders in the retirement plan industry has been a long time coming.

See these numbers, for instance. Between 2014 and 16, the adviser’s average revenue for providing services to a $50 million plan decreased by 12.5%. The bigger the plan, the worse the fee compression. $400 million plans saw fee reductions of 26%.

Another challenge that the plan providers, administrators and recordkeepers face is that plan sponsors demand more for less. When they don’t get it, they look elsewhere. In the 2021 plan sponsor attitudes survey, 34% said they are actively looking to switch advisers, compared with just 16% in 2020. They were seeking:

  • Better employee communication and education
  • Lower fees
  • More retirement expertise
  • Better investment portfolio

Plan sponsors today expect uninterrupted connectivity, timely updates, better visibility, hassle-free claim resolution, and easy access to support teams. To deliver these while combating fee compression, retirement plan providers are choosing the path of strategic mergers and acquisitions to leverage economies of scale. This, of course, creates additional problems of disparate systems unable to work together, creating data siloes, defeating the very purpose.

By and large, focusing exclusively on reducing costs is a race to the bottom. At Congruent, we believe that stakeholders in the retirement plan industry must focus on delivering incremental value, identifying unique opportunities to increase revenue. Here are some ways in which you can do both.

Build applications for long-term agility

The last few years have been defined by chaos, unpredictability and constant change. We’ve all heard that the competitive advantage of the future will be agility and resilience. Retirement plan providers, administrators and recordkeepers must invest in technology solutions that enable long-term agility and resilience.

For instance, unlike legacy solutions that integrate business rules and code, modern solutions decouple them, making changes quickly and frequently. Microservices-based architecture can allow you to build lightweight, more reliable cloud applications than ever before. Applications that integrate with other software make workflows simpler.

By modernizing and integrating the application landscape, stakeholders can do more with less.

Leverage automation to save costs

From simple rule-based scripts to advanced artificial intelligence-driven automation, you can dramatically reduce the cost of operations with the right investment. For instance, payroll and census automation can make record processing quick, error-free and efficient. It can prevent having to employ back-office and operations staff to perform repetitive and tedious tasks.

On the other hand, AI-powered tools can extract information, consolidate data, identify errors, even perform auto-corrections. It can also automatically notify plan sponsors of these errors, inviting them to fix it themselves. This can save plan providers significant time and money.

Use data for competitive advantage 

With widespread digitization, if there is one thing that enterprises have an abundance of, it is data. Meaningful investments in analytics, machine learning and artificial intelligence can help stakeholders leverage their data towards competitive advantage.

For instance, plan providers can use participant data for hyper-personalization. For example, you can analyze data about income, location, marital status, family size, local real estate prices, cost of living etc., to predict the income replacement ratio (post-retirement income needed to maintain the current standard of living) for each individual. Based on this, you can make dynamic recommendations for each plan participant.

You can use organizational data to build insights, which sponsors can, in turn, use to serve their employees better. For instance, if employees who contribute more to 401(k) last longer in the organization, you can use this insight to help sponsors design retirement-driven employee engagement plans. This way, you can take on an advisory partnership with sponsors instead of just an operations vendor, increasing your overall share of wallet.

You can also bring together internal and external data like global economic, social and political trends to plan for the future. You can use these insights to redesign plans, optimize plan management etc., that are more suitable for the evolving marketplace.

Offer value-added services

As more and more millennials and Gen X-ers start planning for their retirement, there is a growing demand for direct interaction with them. You can:

  • Develop mobile/web applications that offer real-time visibility into their retirement plans
  • Educate them on their options and possibilities, empowering them to invest better
  • Build chatbots and other self-service tools for participants and sponsors to get quicker/better customer services
  • Automate payments/debits to save the hassle of manual transactions
  • Simplify processes to increase contributions, make adjustments, choose plans etc.

By radically transforming how service is delivered, plan providers, administrators, and recordkeepers can create value where none exists today. Taking inspiration from the world of technology startups, you can offer these value-added services at a one-time fee or a regular subscription or a freemium model, charging sponsors or participants for a better/useful experience.

This way, the retirement plan industry can open up new revenue potential instead of fighting for the shrinking fees for existing services.

Would you like to know how modernizing the core systems in the retirement plan industry can save you up to 70% in costs? Click here.

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