Emergence of novel trends in US retirement segment
The US retirement sector is witnessing a transformative shift as new trends begin to emerge. In this dynamic landscape, innovative practices and approaches are reshaping the way employees plan for their retirement, particularly after the breakout of the Covid-19 pandemic, which has compelled employees to exhibit more seriousness about building a retirement corpus.
There has been a change in employee attitude towards retirement planning. They are now keener to associate with employers who offer comprehensive workplace benefits. The prominence of workplace benefits has partially driven the demand for retirement plans, leading to a growth of the defined contribution (DC) market, which is now much ahead of the defined benefit (DB) plans market.
As per the Investment Company Institute (an association representing regulated investment funds), the value of assets in the US retirement market stood at USD35.4 tr as of Mar’23. Of that value, DC plans accounted for USD9.8 tr or 28%, the second-highest share by product after IRAs. Among DC plans, 401k plans were the most popular and accounted for 70% of the DC plan assets. Over the years, 401k plans have gained popularity, with their assets compounding at a growth rate of 11% since inception (1974).
While the workplace retirement market is well penetrated for large and medium private employers, the small employer segment remains underpenetrated with a significant number of private sector workers being deprived of retirement benefits. Data from the US Bureau of Labor Statistics reveals that 49% of small private sector firms (<49 employees) did not have access to DC plans as of Mar’22. Furthermore, small plans (<49 participants) represent only 8% of DC assets as per US Department of Labor publication released in Oct’22. These employers are still struggling to offer retirement plans to their employees, predominantly owing to affordability issues due to the high cost of retirement plan administration. In addition, a lack of awareness about the process of offering a retirement plan is a contributing factor.
Defined Contribution Market Size Split by Participants (As of Dec’20)
By Establishing Size: Number of Private Workers (As of Mar’22)
Increasing vigilance by US regulators to improve accessibility to small retirement plans market
US regulators are striving to enhance the adoption rate of retirement plans among employees of small firms, as these firms have been struggling to offer retirement options to their employees. There is an increasing push from regulatory authorities to better prepare employees for retirement savings. Meanwhile, lawmakers are also supporting regulators by introducing bills and regulations that can help achieve this goal.
New regulations for small employers
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Regulations
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Description
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Impact on small retirement plan market
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State Facilitated Retirement Programs (SFRPs)
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• SFRPs mandate eligible employers to offer their employees a retirement plan option. Generally, employers can choose between enrolling employees into a state-sponsored program or offering a qualifying retirement plan.
• During the 2022 state legislative sessions, at least 21 states had established legislation to introduce new programs and amend the existing ones. |
• States that implement SFRPs will have to make it mandatory for small employers to adopt retirement plans, thereby boosting the overall adoption of retirement plans among small businesses in the US.
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Pooled Employer Plans (PEPs)
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• PEPs were established under the Secure Act of 2019. The SECURE 2.0 Act of 2022 expanded their coverage to include 403b plans and the mandated provision of auto-enrollment and auto-escalation features in 401k and 403b plans from 2025.
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• PEPs are a good alternative for small employers that cannot afford the high administration costs associated with expensive plans. According to the EBRI, PEPs can reduce retirement deficits by up to 27%.
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Auto-enrollment and auto-escalation
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• The SECURE 2.0 Act of 2022 requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees from 2025.
• The contribution rate will increase by 1% annually until an individual’s contribution rate reaches 10%, but it will not exceed 15%. |
• Automatic enrollment is expected to boost the participation of employees in DC plans.
• Auto-escalation is expected to ensure that employees make sufficient contributions to ensure optimum retirement balance. |
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Auto-portability
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• Auto-portability can boost the retirement savings of participants by automatically consolidating retirement accounts when changing jobs.
• In Oct’22, Fidelity Investments, Vanguard, and Alight Solutions partnered to form Portability Services Network, which is a collaboration of the leading workplace retirement plan recordkeepers to arrest cash-out leakages from the US retirement system. In 2023, Empower and TIAA also joined the network. |
• Auto-portability is likely to boost the retirement balances of employees. According to a study by the EBRI, full auto-portability can result in additional retirement savings of USD2 tn over 40 years for employees in the US.
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Amid the regulatory vigilance, various large retirement firms are venturing into the small retirement plan market. These firms include recordkeepers, consultants (institutional investment consultants, retirement aggregators), and DC-managed account sponsors, among others.
- In May’23, JP Morgan (an institutional investment consultant) partnered with Vestwell (a digital recordkeeper) to provide greater support for the Everyday 401k plan (a small-business savings offering).
- In Oct’22, Aon (a benefits broker) reported that its PEP has crossed USD1 bn in assets with more than 40 employers providing retirement benefits to more than 40,000 employees.
- In the same month, Standard Insurance Company (which specializes in providing retirement plans to small- and mid-market firms) announced the acquisition of the recordkeeping business of Securian Financial, which also operates in the same space as its acquirer.
- In Jan’22, Transamerica (a recordkeeper) launched a packaged solution called Transamerica Advantage Solution for small companies looking for workplace retirement plans for their employees.
Companies that have launched retirement products recently
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Retirement Players
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PEP Name
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Launch Date
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Details
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LifeSight PEP
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Feb’23
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Offerings are primarily focused on small businesses
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ESG Pooled Employer Plan
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Jan’23
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Offerings are primarily focused on small businesses
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YOUR 401(k) PLAN
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Jan’22
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Offerings are primarily focused on small businesses
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What type of product offerings are likely to emerge in this space?
While some retirement players have already introduced specialized products for the small plan market, the following segments are expected to witness even more product launches:
- PEPs: The demand for PEPs is likely to improve. According to a Cerulli whitepaper, PEP – The Next Big Thing, published in Mar’21, 39% of recordkeepers can enter the PEP market if they are approached by their existing clients or consultants / advisors.
- In addition, major recordkeepers (Fidelity, Voya, Paychex, etc.) and benefit brokers (Aon, Mercer, etc.) consider PEPs to be an opportunity that can help to close the retirement coverage gap, particularly among small employers, through simplified and back-to-basics DC plans.
- SFRPs: These programs are likely to be useful for addressing retirement security for employees. According to a survey by the National Institute on Retirement Security in Nov’21, 72% of the surveyed Americans agreed that SFRPs are a good idea.
- SFRPs enjoy strong support across generational lines, with the highest support from millennials (78%).
- In addition, 75% of the respondents said that they would participate in SFRPs.
Why is it important for retirement firms to tap into this market?
The small retirement plans market is currently at a nascent stage. However, it presents a strategic growth opportunity for retirement players due to the low availability of retirement benefits for employees and favorable regulations that boost retirement adoption.
Looking ahead, a significant improvement is expected in the accessibility to retirement plans for small private businesses. It is believed to reach almost the same levels as seen across larger enterprises. States mandating retirement plans for employers will also witness a notable increase in DC plan coverage. According to a report by Transamerica in Mar’23, small employer workplace benefits are projected to experience a surge in DC plan coverage by 2026. It is estimated that retirement plan coverage in the under-100 employees category will match that of the 100+ employees category. Furthermore, Vestwell published a report (2023 Advisor Trends) in Jan’23 which corroborate similar outlook. It reveals that 40% of advisors anticipate their practice to significantly grow due to rapid expansion of the small plan retirement market
Considering the promising outlook, retirement firms should seize the opportunity to target this market and gain an early-mover advantage. By doing so, they can expand their existing clientele and grow their assets under administration. Venturing into this nascent market can position them strategically for future growth in the evolving landscape of small retirement plans.
How can Evalueserve help?
Evalueserve provides comprehensive market and competitive intelligence solutions for retirement firms focused on workplace retirement market helping them to gain timely access to relevant and actionable insights. Such firms can stay updated with latest industry trends, regulations, market opportunities, and competitor insights. This would help them to take strategic business decisions such as new investments, potential M&As to enter new markets, expand existing suite of product offerings, and others.
Here's how Evalueserve can assist clients in these areas:
- Industry research: Evalueserve provides deep industry insights covering the latest trends, evolving regulatory and investment frameworks, market sizing, and potential industry opportunities.
- Competitor Strategy: Our competitive insights solutions help in the development of highly focused competitive strategies to counter imminent threats. We also offer strategic business insights, competitor marketing positioning (participant engagement analysis), and earnings coverage of peers to understand management viewpoints and their strategic plans.
- Product Intelligence: Evalueserve conducts product benchmarking, provides insights that enhance the value proposition of any existing suite of offerings, and helps in launching innovative products to stay ahead in the marketplace.
