The retirement plan industry is experiencing structural shift to improve competitiveness. New generation technologies can help meet the goals, but the journey will not be an easy one
There is a big churn happening across industries worldwide. The retirement plan industry is no exception. On the one hand, narrow margins is pushing the players to consolidate and collaborate to improve profitability. On the other, they need to digitally transform themselves to leverage the benefits new age technologies that can help improve operational efficiencies, provide great customer experience and better manage the costs.
Poised to grow but margins under pressure
A McKinsey report pegs the retirement market in the United States to be the largest in the world with $26 trillion in assets held in retirement-related, public and private, defined contribution (DC) and defined benefit (DB) plans, IRAs, and annuities. Retirement record keepers, asset managers, wealth managers, annuity writers, and life insurers together generate revenues of $430 billion from these assets. There is an increasing concern about the possibility of the asset pool diminishing once the baby boomers complete their journey into retirement. However, according to McKinsey there is no cause for concern there. By 2026, 75% of household financial assets is expected to be held by those aged over 55, which is an increase over current numbers by 65%.
The Defined Contribution (DC) market is expected to contribute a major chunk with more than 110 million participant accounts. This is about 30% of the managed retirement assets in the country at nearly $8 trillion in assets, generating nearly $30 billion revenue for asset managers and record keepers.
While this is good news, the future is not without its hiccups. Several structural changes are squeezing the record keepers who are managing with, at best, narrow margins. Further, a large market space, improved transparency and a growing intermediary sophistication in the small and mid-sized plan markets is further pushing the pricing southwards.
To counter these trends, record keepers are looking to consolidating or merging with/acquiring other players to scale up operations quickly and reduce competitive pressures.
M&A presents its own challenges
The record keeping industry is highly fragmented. Hence, differentiation has become important to improve business revenues and address competition. Apart from competition and the need for alternate revenue channels, record keepers are also unable to keep operation costs low or scale up fast due to outdated technology that demands deferred maintenance and manually intensive interventions. Also, changing sponsor and participant expectations is pushing providers to invest in digital technologies. Transparency of the sponsor fee is another area of disruption and the need for fee disclosure is further eroding the margins.
McKinsey envisages three possibilities for the record keepers to grow. One, through continued consolidation between the players. Two, disruption from digital players such as fintech companies to offer a one-stop solution to meet the financial requirements of the plan participants. Finally, entry of human resources information systems providers providing all HR solutions over one platform.
Between 2006 and 2018, the top 10 players increased their share from 50% to 71% through consolidation to leverage brand, pricing, and participant capabilities. Consolidations can help manage cost structures, increase investment in technology, focus more on developing new products & services, and manage regulatory changes better.
In recent years, strategic buyers took over the record keeping business of giants such as JP Morgan, Mercer, The Hartford and Wells Fargo, all aimed at boosting scale, which has become critical for retirement plan providers due to fee compression, which has dropped from $118 annually per participant in 2006 to $57 in 2016.
However, the mergers bring with them a host of other challenges – not only that of integrating teams, but technologies, too. With many players functioning on proprietary platforms, the question arises – which platform to go for, or opt for a completely new one.
CX will be key and technology will be the enabler
Digital transformation enables data sharing across different business functions, seamlessly. This provides deeper insights that help in enhancing customer delight, improving efficiency, and cutting costs. Retirement industry can provide better service or develop products and services that cater to their specific needs.
The McKinsey report observes that there is a 10-fold difference in CX capabilities between leading and lagging organizations. Data and analytics are expected to play a key role in the next 10 years. Some of the key elements include:
- Systematic integration of advanced analytics
- End-to-end digitization
- Agile ways of working
- Robotics and automation
- Sourcing optimization
- Lean management
This can transform the business from inwardly-oriented, functionally-aligned operating models to externally-oriented, cross-functional models.
Naturally, this will require the firms to develop relevant skills and capabilities to be able to dynamically respond to the evolving market needs and continuously improve to meet customer needs. It will also mean greater investment in the infrastructure, tools and platforms to be able to leverage evolving technologies and be digitally enabled.
However, it is not only difficult but also expensive. A better option is to outsource to a capable, experienced and successful partner who has domain expertise as well as technological skills to be able to effect this.
Digital Transformation with Congruent
Congruent Solutions, which has been offering solutions for the retirement plan industry for the last two decades, believes that the market evolution is inevitable. There are many levels at which these changes can be a challenge for the record keepers:
- Rationalization of platforms – be it in the case of consolidation, M&A or just upgrading technologies, recordkeeping companies will need to be able to identify the right technology that can help them meet their digitization goals. The primary challenge is in making the old and the new systems talk to each other.
- Fiduciary concerns and data integrity are top concerns as they will impact the plan participants’ fund management. Accurate, on-time information, enabling self-service and automation will be critical.
- Technology will play a major role in differentiation by providing accurate and safe data; insights through analytics for enabling customization as well as new products and services.
Role of next generation technologies such as Machine Learning, Artificial Intelligence, Platform as a Service and Block chain cannot be overstated. These will be critical in meeting the transformation goals.
Congruent’s expertise in technology and the domain, as well as its experience make it an ideal partner to meet your digital transformation needs. Its CORE Platform draws from this experience and addresses the critical needs of the retirement plan industry, helping it leverage new technologies without missing a beat and without causing disruption of services.
If you are embarking on a digital transformation journey and are looking for a partner, Congruent is here to help.