In the last ten years, the landscape for US defined contribution (DC) retirement plans has seen remarkable growth. Affected by strong equity market performance and enhanced accessibility, providers, often referred to as retirement recordkeepers, have enjoyed consistent revenue increases. However, changes in demographics, competitive pressures, and industry evolution are creating a tipping point that could reshape the future of this sector.

The Tipping Point: Shifting Demographics and Business Models

The transition of the DC system from accumulation to decumulation is complicating the retirement landscape. With the retirement of baby boomers, net outflows are surpassing contributions from younger generations, a trend that is expected to intensify as the number of individuals reaching retirement age peaks in 2026-2027. This demographic upheaval is prompting retirement recordkeepers to reconsider their business models.

In response to increasing competition, many providers have significantly reduced administration fees to attract new clients, leading to declining revenues from traditional fee structures. As a result, the industry is witnessing a significant shift toward cross-subsidized business models, where recordkeeping serves as a foundation for additional revenue through complementary offerings like wealth management and financial advisory services.

Market Growth Versus Underlying Economics

Despite a consistent upward trajectory in the DC market, the financial underpinnings of the system have transformed dramatically. Revenue generated from the DC system—comprising both investment products and recordkeeping—has risen from $28 billion in 2013 to $39 billion in 2023. In contrast, revenues from retail wealth management surged by $45 billion during the same period.

This growth highlights a strategic evolution from product-centric to participant-centric approaches within the industry, as providers capitalize on opportunities outside traditional revenue streams.

Key Trends Influencing the Retirement Solutions Sector

As of 2024, the US holds approximately $36 trillion in retirement assets, encompassing various retirement plans and individual retirement accounts (IRAs). Growth in access and utilization of DC plans has increased substantially, driven by features like automatic enrollment and legislative support such as the SECURE Act, enhancing overall asset participation.

Demographic shifts have significant implications for potential growth and profitability. Approximately 11,200 Americans retire daily, leading to a shrinking contribution base for DC plans, which is projected to continue experiencing net outflows until 2030.

Challenges and Opportunities for Recordkeepers

Two major challenges are emerging for retirement recordkeepers:

• Revenue Stream Transformation: As competition continues to intensify, traditional administrative fees are declining. Recordkeepers must now seek profitability through ancillary products and innovative service offerings.
• Cost Management: Rising operational costs driven by inflation necessitate a careful re-evaluation of spending. Providers are increasingly adopting technology-driven solutions like AI to enhance efficiency and cut costs.

Finding New Revenue Opportunities

Providers are actively exploring new methods for generating revenue through various strategies:

• Enhancing the rollover process for departing employees to capture IRA contributions.
• Establishing seamless connections with plan participants to encourage crossovers into retail accounts.
• Expanding offerings to include in-plan annuities and custom decumulation solutions.

Data from the 2024 McKinsey US Plan Participant Survey indicates a growing openness among participants to receive financial advice from their retirement solution providers, highlighting an opportunity area for recordkeepers.

Strategic Recommendations for Providers

To adapt to these evolving dynamics, retirement solution providers should consider the following strategies:

• Evaluate the profitability of existing plans to identify areas ripe for growth.
• Streamline the rollover process, ensuring that participants find it accessible and user-friendly.
• Leverage technology to improve customer engagement and satisfaction, particularly in digital interactions.
• Innovate product offerings focusing on retirement income solutions that cater to a diverse workforce.

Conclusion

The retirement industry, essential to the financial ecosystem, is undergoing significant transformation. Although challenges abound, the shifting landscape presents numerous opportunities for forward-thinking retirement solutions providers. By embracing strategic adjustments and focusing on participant-centric approaches, they can thrive in an increasingly complex environment.