Market Analysis – 84131801 – Self directed or employer sponsored retirement funds

Executive Summary

The global market for retirement funds, with total assets under management (AUM) of est. $60 trillion, is experiencing steady growth driven by demographic shifts and regulatory tailwinds. The market saw an estimated 3-year CAGR of 6.5%, though recent market volatility has tempered short-term results. The primary opportunity for our organization lies in leveraging intense market competition and fee compression to reduce plan administration costs and lower employee expense ratios. Conversely, the most significant threat is the escalating complexity of cybersecurity and regulatory compliance, which demands continuous due diligence on provider capabilities.

Market Size & Growth

The global Total Addressable Market (TAM) for retirement fund assets is estimated at $60 trillion for year-end 2023. This market is projected to grow at a compound annual growth rate (CAGR) of est. 5-6% over the next five years, driven by mandatory contributions, equity market appreciation, and an expanding workforce in emerging economies. The three largest geographic markets are the United States (est. 64% of AUM), the United Kingdom (est. 7%), and Japan (est. 6%).

[Source - Thinking Ahead Institute, Jan 2024]

Key Drivers & Constraints

1. Demographic Shifts: Aging populations in developed nations and longer life expectancies increase the necessity and size of retirement savings, driving consistent inflows.
2. Regulatory Mandates: Legislation like the U.S. SECURE 2.0 Act encourages broader participation through auto-enrollment, contribution matching for student loan payments, and catch-up contributions, directly boosting AUM.
3. Market Volatility: As fees are often asset-based, significant downturns in equity and bond markets can directly reduce provider revenues and impact asset growth, as seen in 2022.
4. Fee Compression: Intense competition, particularly from low-cost index funds and ETFs, continues to exert downward pressure on investment management and administrative fees, squeezing provider margins.
5. Technological Adoption: Demand for user-friendly mobile platforms, robo-advisory services, and integrated "financial wellness" tools is a key differentiator, requiring significant and ongoing R&D investment from providers.
6. Cybersecurity & Data Privacy: The vast amount of sensitive personal and financial data held by providers makes them a prime target for cyber-attacks, elevating compliance and security costs.

Competitive Landscape

Barriers to entry are High, characterized by immense regulatory hurdles (e.g., ERISA in the U.S.), significant capital requirements, the need for extensive distribution networks, and the paramount importance of brand trust and reputation.

⮕ Tier 1 Leaders * Fidelity Investments: Differentiated by its massive scale, integrated brokerage and workplace benefits ecosystem, and strong active management capabilities. * Vanguard Group: A market disruptor known for its client-owned structure and pioneering role in low-cost passive index investing. * Empower: Focuses exclusively on the workplace retirement market, growing aggressively through acquisition to achieve scale and technological integration. * T. Rowe Price: Respected for its long-term, research-driven active management approach, particularly in target-date funds.

⮕ Emerging/Niche Players * Betterment for Business: A fintech-native provider offering a modern, technology-first platform with automated portfolio management, appealing to tech-savvy workforces. * Guideline: Specializes in the small-to-medium business (SMB) market, offering low, flat-fee 401(k) plans with full ERISA 3(38) fiduciary services. * Human Interest: Focuses on simplifying retirement benefits for SMBs with transparent pricing and streamlined plan administration.

Pricing Mechanics

Pricing for employer-sponsored plans is a blend of direct (employer-paid) and indirect (employee-paid) fees. The primary employer cost is the recordkeeping and administration fee, often structured as a flat annual fee or a per-participant-per-year (PPPY) charge, ranging from $30 to $60 PPPY for large plans. This fee covers compliance testing, reporting, call center support, and the technology platform.

The bulk of the cost is borne by employees through investment expense ratios, an asset-based fee (AUM-based) charged by the underlying mutual funds. These ratios vary widely, from as low as 0.02% for passive index funds to over 1.0% for actively managed or specialty funds. Additional costs can include trading fees, loan origination fees, or fees for managed account services. Intense market competition has led to significant fee compression, with providers often subsidizing recordkeeping costs to win AUM.

Most Volatile Cost Elements (from a buyer's perspective): 1. Expense Ratios (Actively Managed Funds): Can fluctuate based on fund performance and strategy; have seen downward pressure of est. 10-15% over the last 3 years due to competition from passive funds. 2. Recordkeeping Fees: Highly negotiable and subject to market repricing; large plans can often negotiate reductions of 20-30% upon contract renewal or competitive bidding. 3. Managed Account/Advisory Fees: Optional, asset-based fees that vary with market performance; have seen increased adoption but also fee scrutiny.

Recent Trends & Innovation

• SECURE 2.0 Act Implementation (Enacted Dec 2022): Providers are rapidly developing and marketing new features to support provisions like emergency savings accounts linked to retirement plans, automatic enrollment, and employer matching for employee student loan payments.
• Consolidation for Scale (2022-2023): Major players continue to acquire smaller competitors to gain scale and technology. A key example is Empower's completion of its acquisition of Prudential Financial's full-service retirement business (April 2022), adding $313 billion in AUM.
• Rise of In-Plan Personalization: A shift from standardized target-date funds to more personalized solutions, including managed accounts, dynamic "hybrid" Qualified Default Investment Alternatives (QDIAs), and direct indexing at scale.
• ESG Scrutiny and Politicization (2023-Present): While demand for Environmental, Social, and Governance (ESG) funds grew, providers now face political and regulatory scrutiny from both sides, creating compliance and product-positioning challenges.

Supplier Landscape

Regional Focus: North Carolina (USA)

North Carolina presents a high-demand market for retirement plan services. The state's robust economic growth, particularly in the finance (Charlotte) and technology/life sciences (Research Triangle Park) sectors, creates a highly competitive labor market where premier retirement benefits are a critical tool for talent attraction and retention. Demand outlook is strong, fueled by population growth and job creation. Local capacity is excellent, with major providers like Fidelity and T. Rowe Price having significant operational centers in the state. The state's stable regulatory environment and competitive corporate tax rate present no significant barriers for plan sponsors.

Risk Outlook

Actionable Sourcing Recommendations

1. Initiate a Fee & Service Benchmark Analysis. Within the next 6 months, conduct a formal benchmark of our plan's recordkeeping fees and investment expense ratios against the market. Leverage findings and the current fee-compression environment to negotiate a 15-20% reduction in administrative fees and explore lower-cost fund share classes, directly improving employee outcomes.

2. Issue an RFI for Financial Wellness & SECURE 2.0 Capabilities. Within 9 months, issue a Request for Information (RFI) to our incumbent and 2-3 top competitors. The RFI should focus on evaluating their integrated platforms for financial wellness, specifically their solutions for student loan payment matching and in-plan emergency savings, to ensure our benefits remain competitive and compliant.