In today's highly competitive US recordkeeping market, providers are grappling with a perfect storm of declining per-participant fees and rising operational costs (spend on technology, product development, and marketing) leading to consolidation amongst RKs to gain scale and operational efficiencies. As traditional revenue streams dwindle, providers are compelled to seek innovative solutions. Cross-selling from other lines of businesses has emerged as a promising strategy to diversify revenue sources, mitigate margin erosion, secure a sustainable future and build a more resilient business model. This blog delves into the key trends shaping the industry, including consolidation, margin pressures, and the growing importance of cross-selling. By understanding these dynamics, recordkeepers can position themselves for long-term success.
Fee Pressure and Declining Profitability Lead US Recordkeepers to Consolidate
The US defined contribution (DC) recordkeeping (RK) industry has undergone substantial consolidation over the last decade. Increasing margin pressure, due to a continued decline in administration fees, has compelled players to search for scale through M&A, leading to two significant advantages – operational cost-advantage, resulting in lower cost per participant, and increased investment capabilities needed in a rapidly evolving retirement market.
The following tables illustrate margin pressure on RK businesses across plan asset sizes. The mid plan market ($100-250M) faced the steepest decline in 2020-22.
Average RK Fee Per Participant by Plan Asset Size
Average RK Fee Per Participant by Number of Participants
Following consolidation, the share of wallets of the top five recordkeepers has increased significantly, led by acquisitions such as Empower’s acquisition of Prudential’s retirement business and JP Morgan’s Retirement Plan Services, and Principal’s acquisition of Wells Fargo’s Institutional Retirement and Trust business. With these moves, the larger recordkeepers now have the capability to not only optimize operating expenses but also invest in digital technologies, analytics, and artificial intelligence-based capabilities to better participant experience. They could also invest in the next generation of financial wellness and advise offerings needed to better engage with their existing and prospective customers.
Market Share of Top Recordkeepers by DC Assets
Market Share of Top Recordkeepers by DC Participants
The top five recordkeepers service three-fourths of the total participant base.
Focus on Expanding Revenue Base to Offset Fee Compression
As margins continue to stay under pressure, recordkeeping businesses are experiencing a dire need to identify additional source of revenues. While recordkeeping may have become a highly commoditized business with thin margins, it creates an opportunity for substantial revenue generation through cross-selling of products from different line of businesses to participants. Recordkeepers in the DC ecosystem have different core products and they leverage their unique capabilities to upsell such products to participants both in-plan and out-of-plan. Consequently, different entities like banks, insurers, wealth managers, asset managers, and human capital solution managers play a role in the RK market.
Potential Opportunities to Sell New Products
-
Workplace Advice Solutions
-
Up Selling Opportunities
In-Plan
Advice Solutions
- Managed Accounts
- TDFs (Customized TDF, Personalized TDF)
- Dynamic QDIA
- Advisor Managed Accounts
- Pooled Employer Plans / SFRPs
Retirement Income Feature
- Annuities embedded within
retirement plan
Group Insurance
- Life / Health + Voluntary Benefits
Others
- HSAs, FSAs etc.
Out of Plan
Wealth Management
(Stock Broking, Banking, Trust Services, Insurance Solutions, Annuities, Managed Account, Estate Planning, Premium Banking, Investment Solutions – MFs / ETFs and others)
IRA Rollovers
Potential Opportunities to Sell New Products
Use Cases
RK such as Principal and Empower have admitted that cross-selling has helped generate additional revenue.
RK DC Assets (As of Dec’23)
$510B, Rank: 7
Management Viewpoints
Principal generates significant revenues from cross selling products (primarily asset management, banking, and annuities solutions) from different lines of business to retirement participants. It generates 32% additional revenue for every dollar it earns through its recordkeeping business.
“For every $1 in revenue from our recordkeeping platform, 32 cents is generated and reported in other businesses of Principal”
Principal Investor Day 2021, Jun’21
RK DC Assets (As of Dec’23)
$1.4T, Rank: 2
Management Viewpoints
Empower has a huge opportunity to upsell wealth management solutions via its Personal Wealth business. In 2020, the firm acquired Personal Capital for $1B to boost its retail wealth management business. The company’s management actively targets workplace participants for IRA rollover convergence from DC plans.
“6% of workplace DC assets rollover every year” (based on Empower book of business experience)
Why RK Businesses Must Augment Revenues by Cross Selling?
There is a continuous pressure on RKs to invest in technology upgrades, digital platforms, new products and services to meet the evolving needs of participants and plan sponsors. Employers increasingly prefer RKs who provide them bundled solutions with multiple products on a single platform, while participants want personalized financial wellness solutions and comprehensive retirement plans bundled with health, wealth, and voluntary benefits. In order to stay competitive, it becomes imperative for RKs to generate additional source of revenue to help clients meet their growing investment needs. According to Plan Adviser and Captrust thinktank, RKs need to elevate their revenues to ease the pressure of fee compression.
“But even as more people are saving in workplace retirement plans, the business trend for recordkeepers themselves has gone decidedly in the opposite direction: fee compression, consolidation and the need for related services to drive revenue”
Plan Adviser Article, 401(k) World: Recordkeepers, Advisers and ‘Co-opetition’, Feb’24
“Today’s evolution is not only a response to the financial pressures of shrinking margins but also a tactical shift toward offering a more comprehensive suite of products. It’s a shift that could make recordkeepers feel less like third-party vendors and more like strategic, mission-aligned partners”
Captrust, Recordkeepers Enter a New Era, Mar’24
Comprehending the Potential
Cross selling to DC participants is a tremendous business opportunity. According to Empower management (second largest RK by DC Assets), for every $1 held in a retirement plan, they are likely to have $4 to $5 outside of the plan, highlighting a significant scope for upselling wealth management solutions. In addition, IRA rollovers represent a huge and growing market, as many retirement plan participants seek help with their rollover decisions. According to ICI, IRAs constituted ~36% ($14.3T) of the $39.9T US retirement accounts as of March 2024. IRAs proportionate share in retirement assets is anticipated to reach 41% by 2027 (Cerulli estimates), primarily driven by rollovers from DC plans.
When it comes to in-plan cross selling, managed account adoption is anticipated to improve among plan sponsors. According to Cerulli Associates, the total in-plan managed account market currently stands at over $434B, with Edelman Financial managing 45% of the DC managed account assets and 1.2M program members across 700 employers. A report published by Wilshire in November 2023 indicates that adoption of managed accounts could reach 80% by 2030. Similarly, demand for in-plan guaranteed income solutions is growing. According to a recent survey by LIMRA, 70% of workers believe employers should offer in-plan guaranteed income options.
These figures show why RKs must clearly engage in product cross selling to support revenue growth and offset fee pressure.
How Evalueserve can Help Recordkeepers
Evalueserve provides comprehensive market and competitive intelligence solutions for firms focused on the workplace retirement market and helps them to gain timely access to relevant and actionable insights. By engaging with Evalueserve, such firms can stay updated with latest industry trends, regulations, market opportunities, and competitor insights that enable them to take strategic business decisions related to new investments, potential M&A, and expansion of product offerings.
Here's how Evalueserve assists 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 strategies to counter imminent threats. We also offer strategic business insights, competitor marketing positioning (participant engagement analysis), and earnings coverage of peers to help our clients understand management viewpoints and strategic plans.
- Product Intelligence: Evalueserve conducts product benchmarking, provides insights that enhance the value proposition of existing offerings, and helps launch innovative products to stay ahead in the marketplace.
