A new consultant report suggests the heightened awareness of retirement income sufficiency coming out of the downturn, along with the red-hot area of auto plan features will propel the DC market to $5.5 trillion in assets by 2015.
“The stakes in the DC market have never been higher.” writes McKinsey & Company in its report, Winning in the Defined Contribution Market of 2015: New Realities Reshape the Competitive Landscape. “The financial crisis and ensuing recession have focused the attention of sponsors, participants and the government on the crucial role DC plans play in ensuring retirement security for millions of Americans. This scrutiny will lead to regulatory changes that will alter the competitive landscape in both predicable and unpredictable ways.”
Among the forces McKinsey predicts will have the most impact on the DC landscape by 2015 are:
- The introduction of auto-IRAs could have a material impact on small plan providers, increasing participation by 40 million and funneling over $100 billion into DC over the next five years.
- Increasing auto default and escalation thresholds could direct an additional $90 billion into DC by 2015 and dramatically improve Americans’ retirement readiness.
- Proposals around greater fee disclosure could induce a shift to flat per-participant recordkeeping fees and away from revenue-sharing models with asset managers, making recordkeeper economics more stable but capping their upside.
- Decisions regarding who can provide advice – and how they can provide it – could shift the balance of power between recordkeepers, asset managers and advisers to those with access to participants.
- A decision on whether to make retirement income solutions QDIAs or to require one in every plan could provide an entry point for manufacturers with annuity capabilities and dramatically shift a plan’s typical allocation. This would also greatly reduce the IRA opportunity, dramatically changing the economics for integrated recordkeepers.
“The adoption of any of these regulatory measures could significantly impact who wins and who loses in DC, just as the PPA (Pension Protection Act) changed competitive dynamics by providing safe-harbor protection for the adoption of target-date or target-risk solutions as QDIAs,” McKinsey comments.
Better Plan Sponsors
McKinsey also contends in its report Winning in the Defined Contribution Market of 2015: New Realities Reshape the Competitive Landscape that plan sponsors are getting better at what they do, with an increasing amount of help from consultants, because of heightened fiduciary and cost concerns and the increased complexity of plan rules and product design.
Plans will continue to streamline and simplify fund lineups, driven largely by the consultants’ guidance. “The trend toward simplification will force asset managers to specialize more, deliver a clear value proposition around a narrower band of asset classes and solutions, and raise the bar for investment performance,” the consultant writes.
The streamlining of investment options coupled with the shift to open architecture in target-date funds will create significant growth opportunities for IODC managers, McKinsey also predicts, with IODC market share increasing from 43% to 50%
“Employers are professionalizing their decisionmaking, involving finance, treasury and procurement functions at the expense of human resources. These trends are leading to more sophisticated plan design, rigorous decisionmaking, in-depth due diligence, and increasingly stringent and formalized standards for providers in both asset management and recordkeeping,” the consultant asserts.
Other trends over the next five years, according to McKinsey, will include:
- The share of passive assets in DC plans will double by 2015 to 25%.
- By 2015, nearly 70% of assets will be held by individuals at or within five years of their target date for retirement. This shift will create significant growth opportunities, particularly for fixed-income managers and income-oriented equity managers. “Active equity managers, after two decades of benefiting from DC growth, will be on the short end of this trillion dollar shift,” McKinsey says.
- Segmentation in DC is also being shaped by stark contrasts in flows. Small and mid-size plans and K-12, for example, will experience inflows, driven by increased (and automatic) enrollment and workforces; mega plans by contrast will suffer $200 billion in outflows, owing to an older workforce.
- Differences between plan designs are growing narrower – particularly in the extent 403(b) plans resemble 401(k)s. This is being driven by regulatory changes and a move in the 403(b) world to a single recordkeeper.
- The lines between size segments within the 401(k) world are breaking down, as sponsors of all sizes increasingly demand similar solutions such as open architecture and participant advice.
McKinsey & Company conducted interviews with more than 80 plan sponsors, industry experts, RIAs and consultants, and included its own modeling and proprietary analysis, in preparing the report. The report is available here.