Market Analysis – 64102005 – Individual retirement account IRA, public sector

1. Executive Summary

The U.S. 403(b) retirement plan market, representing public sector and non-profit employees, holds an estimated $1.2 trillion in assets under management (AUM). The market has seen an estimated 3-year CAGR of 6.5%, driven by positive market returns and steady contributions. The single greatest challenge is managing fiduciary risk; intense regulatory scrutiny and litigation over "reasonable fees" are forcing plan sponsors to abandon high-cost, legacy annuity products and seek providers with transparent, low-cost investment platforms. This shift represents a significant opportunity for cost reduction and service improvement.

2. Market Size & Growth

The U.S. 403(b) market is the primary focus for this commodity code, as 403(b) plans are the specific instrument for U.S. public sector and non-profit entities. The global market for similar public-sector retirement vehicles is highly fragmented and country-specific. The projected 5-year CAGR for the U.S. 403(b) market is est. 4-6%, reflecting modest employment growth in the public sector and normalized market return expectations. The three largest geographic markets are the states with the largest public employee populations: 1. California, 2. Texas, 3. New York.

[Source - Investment Company Institute, PLANSPONSOR, est. Dec 2023]

3. Key Drivers & Constraints

1. Regulatory Pressure & Fiduciary Risk: The Department of Labor (DOL) Fiduciary Rule and a wave of class-action lawsuits are compelling plan sponsors (universities, hospitals) to prove their fee structures are "reasonable." This is the primary driver for re-evaluating and consolidating providers.
2. Demand for Low-Cost Investments: Participant and sponsor demand for low-cost passive index funds and ETFs is accelerating. This erodes revenue for providers reliant on high-margin active mutual funds and annuities.
3. Technology & Participant Experience: There is a growing expectation for sophisticated, user-friendly digital platforms, mobile apps, and integrated financial wellness tools. Providers failing to invest in technology face significant churn risk.
4. Market Consolidation: Aggressive M&A activity among recordkeepers (e.g., Empower) is reducing the number of providers, increasing the scale of the remaining players and intensifying competition for large plans.
5. Fragmented Customer Base: The 403(b) market consists of thousands of individual school districts and non-profits, making it historically inefficient to service. This creates an advantage for providers with scale or a specialized sales force.

4. Competitive Landscape

Barriers to entry are High, given the significant capital required for recordkeeping technology, stringent regulatory compliance (SEC, DOL, IRS), and the incumbency advantage of established providers within large public institutions.

⮕ Tier 1 Leaders * TIAA: Dominant legacy provider in higher education with deeply integrated relationships and proprietary annuity products. * Fidelity Investments: Leading provider known for its powerful technology platform, extensive fund choice, and strong participant services. * Vanguard: The catalyst for industry-wide fee compression, leveraging its reputation for low-cost index funds and ETFs. * Corebridge Financial (formerly VALIC): Strong historical presence in the K-12 school market through a large, agent-based distribution network.

⮕ Emerging/Niche Players * Empower: Rapidly gaining market share through aggressive M&A and a strong focus on the government sector (457 plans) and large corporate plans. * MissionSquare Retirement: Niche focus on city, county, and state-level public employees, offering tailored services. * Equitable (formerly AXA): A significant player in the K-12 market, though facing pressure from lower-cost competitors. * Aspire Financial Services: An open-architecture recordkeeper enabling smaller, independent advisors to compete for 403(b) plan business.

5. Pricing Mechanics

The "price" of a 403(b) plan is a layered structure of fees, not a single cost. The primary component is the investment expense ratio, an asset-based fee charged by the underlying mutual funds or other investment vehicles. This typically accounts for over 80% of the total plan cost. The second layer is the recordkeeping and administration (RK&A) fee, which can be structured as a per-participant flat dollar amount (e.g., $30-$60/year) or a secondary asset-based fee (e.g., 0.05%-0.20%).

Additional costs can include trading fees, custodial fees, and fees for advisory services from a third-party consultant. Intense competition and fiduciary scrutiny are driving total "all-in" costs down, particularly for larger plans that can leverage their scale to negotiate lower RK&A fees and demand institutional share classes for investments.

The most volatile cost elements are those subject to the most intense competitive and regulatory pressure: 1. Actively Managed Fund Expense Ratios: Downward pressure from passive alternatives has driven fees down est. 15-25% over the last 3-5 years. 2. Recordkeeping Fees: Subject to intense negotiation during RFPs, with fees for large plans falling est. 10-20% in the same period. 3. Annuity Contract Fees (M&E, Surrender Charges): Facing the highest scrutiny for being opaque and costly, leading many sponsors to eliminate them as options.

6. Recent Trends & Innovation

• Plan Consolidation (2022-Present): Plan sponsors are aggressively moving from multi-provider "vendor lists" to a single recordkeeper to reduce administrative burden, lower costs, and improve fiduciary oversight.
• Rise of CITs (2021-2023): Collective Investment Trusts (CITs), which are lower-cost, bank-managed investment vehicles similar to mutual funds, are now being widely adopted in 403(b) plans, further driving down investment costs.
• Major M&A Activity (April 2022): Empower closed its acquisition of Prudential's retirement business, creating a mega-provider with over $1.4 trillion in AUM and signaling continued consolidation in the recordkeeping industry.
• Financial Wellness Integration (2022-2023): Leading providers are differentiating by offering holistic financial wellness platforms that include tools for student loan repayment, emergency savings accounts, and personal budgeting, integrated directly with the retirement portal.

7. Supplier Landscape

8. Regional Focus: North Carolina (USA)

North Carolina represents a highly attractive and competitive market for 403(b) providers. Demand is robust, anchored by the large UNC System (17 institutions), a statewide community college system, and major non-profit hospital networks like Atrium Health and Novant Health. The state's consistent population growth also fuels expansion in K-12 school districts. Supplier capacity is excellent; Fidelity maintains a major campus in Research Triangle Park and TIAA has a large corporate center in Charlotte, ensuring strong local sales, service, and executive presence. The primary sourcing dynamic is driven by the large, sophisticated plan sponsors (UNC, major hospitals) who frequently issue competitive RFPs to drive down fees and demand modern technology.

9. Risk Outlook

10. Actionable Sourcing Recommendations

1. Initiate a formal RFI to benchmark current plan fees against the market. Target an all-in cost (recordkeeping + investment expense) below 0.35% by consolidating to a single recordkeeper and prioritizing low-cost investment tiers like CITs and index funds. This directly mitigates the primary fiduciary risk of excessive fees, which has been the focus of recent litigation against peer institutions.

2. Mandate that any potential provider demonstrate a top-quartile digital participant experience via live platform demonstrations and user-satisfaction data. The platform must include integrated financial wellness tools and personalized guidance. This ensures higher employee engagement and better retirement outcomes, maximizing the value of the benefit beyond simple cost-containment and strengthening the organization's position as a top employer.