COVID-19 has increased the need for employers to provide financial wellness for their employees and sales and implementation support for plan providers. Technology investments that provide managerial insight into plan participation and offer “next best” actions to plan participants are vital for plan providers to win and retain business.
Product Trends
Index, target-date, and lifestyle funds have become standard components of many plans. Recent innovations in target-date funds include open architectures, tactical investing to ensure suitable glide paths to ensure sufficient retirement income for participants, and alternative investing strategies.
Plan sponsors are pursuing funds with lower fees to avoid fiduciary breach lawsuits on the grounds of excessive plan fees.
The popularity of managed accounts and automated advice continues to grow. Some firms are offering qualified default investment alternatives (QDIAs) that shift participant funds from target-date funds to managed accounts based on predetermined criteria, e.g., age, years in service, years until retirement. Collective investment trusts are another alternative to mutual funds for qualified retirement plans, offering lower costs and fewer regulatory requirements. The percentage of large DC retirement plan assets in collective investment trusts continues to grow.
The Impact of COVID-19
Smaller plan providers and plan sponsors are cutting back or delaying plan design changes and new products. Plan sponsors are also considering scaling back or suspending matching contributions, though relatively few have done so. Providers and plan sponsors are focusing on ensuring emergency income is available through loans and withdrawals, rather than acting on opportunities for building retirement income via in-plan annuities enabled by the SECURE Act. More deals with plan sponsors are closing online.
M&A Activity
Organic growth remains important, but insurers should also be aware of the potential for acquiring books of business by consolidating recordkeepers. Providers should improve post-consolidation service and support experiences to prevent plan sponsors from leaving. Effective recordkeeping consolidation can allow insurers to scale more rapidly.
Independent broker-dealers and RIAs are also feeling pressure to consolidate, driven by aging workforces, compliance costs, and efficiency concerns, among other factors.
Regulatory Trends
States continue to experiment with state-run retirement plans. Connecticut, Illinois, Maryland, New Jersey, Oregon, and Washington have established state-run programs, along with Colorado’s latest addition, Colorado Secure Savings Plan.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act includes annuity safe harbor provisions for plan sponsors, looser regulation of open multiple employer plans, and the expansion of retirement plan eligibility to part-time workers. The SECURE Act also includes tax incentives for small businesses to offer retirement plans and provisions for in-plan annuity portability, rather than require liquidation or purchasing new annuities.
The CARES (Coronavirus Aid, Relief, and Economic Security) Act treats repayment of coronavirus-related distributions as rollover contributions for retirement plans that accept them. It increases the limit on the amount qualified individuals may borrow from eligible retirement plans (up to $100k) and permits plan sponsors to provide qualified individuals up to one additional year to repay their plan loans.
FinTech and InsureTech
Novarica has found in discussions with insurers that, while they are willing to investigate ways to work with FinTechs and InsureTechs, it is a challenge for them to find startups with platforms that can provide experiences and support for different types of plans. Most insurers are investing in retirement- and retirement-planning-focused InsureTechs instead of acquiring them, licensing their solutions, or partnering with them. Some FinTechs and InsureTechs may compete with insurers as plan providers.
Sales Trends
Recordkeepers expect low plan sales for 2020-Q2 and 2020-Q3, with a slight rebound in 2020-Q4. This rebound will be lower than pre-COVID forecasts, according to an April 2020 survey of defined contribution recordkeepers by the Secure Retirement Institute and the Retirement Leadership Forum.
If the economic impact COVID-19 is similar to that of the 2008 financial crisis, new plan sales, especially small plan market sales, will be most affected. Plan sponsors that are not delaying or canceling deals are prioritizing cybersecurity, financial wellness programs, fraud protection, and participant educational offerings. Fidelity’s Plan Sponsor study found that most plan sponsors had made changes to plan design in the past two years, prioritizing company matching and adding Roth IRA contributions.
Technology Priorities
Defined contribution retirement plan providers continue to invest most heavily in case installation and distribution, as well as in customer engagement and plan design to a lesser extent. Onboarding requires investments in digital capabilities, data and analytics, and core systems. Portal initiatives and communications continue to be vital. A focus on participant financial wellness across the board requires effective communications, reporting, and analytics. Plan sponsors are prioritizing improvements to participant contact center service and educational offerings.
Read Novarica’s report Business and Technology Trends: Defined Contribution Retirement Plans for an in-depth look at the trends in this space.
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