Market Analysis – 84131802 – Self directed or self initiated retirement plans

Market Analysis Brief: Self-Directed Retirement Plans (UNSPSC 84131802)

1. Executive Summary

The U.S. market for self-directed retirement assets, primarily held in IRAs, is valued at $13.2 trillion as of Q3 2023. The market is experiencing steady growth, with a projected 3-year CAGR of est. 5-7%, driven by regulatory tailwinds and a growing demand for investor autonomy. The primary opportunity lies in leveraging technology-driven platforms that offer low-cost, flexible investment options to attract and retain talent. The most significant threat is fee compression, which pressures provider margins and necessitates a focus on scale and value-added services to maintain profitability.

2. Market Size & Growth

The global market for self-directed retirement plans is dominated by the United States, which represents the largest and most mature market. The total addressable market (TAM), measured by assets under management (AUM) in U.S. Individual Retirement Accounts (IRAs), reached $13.2 trillion in the third quarter of 2023 [Source - Investment Company Institute, Dec 2023]. Growth is projected to be moderate but steady, driven by rollovers from employer-sponsored plans and consistent annual contributions.

The three largest geographic markets are: 1. United States 2. United Kingdom (via Self-Invested Personal Pensions - SIPPs) 3. Australia (via Self-Managed Super Funds - SMSFs)

3. Key Drivers & Constraints

1. Demand Driver: Desire for Control & Flexibility. A growing cohort of financially literate employees and gig-economy workers seek greater control over investment choices, including access to alternative assets (crypto, private equity) not available in standard 401(k) lineups.
2. Regulatory Driver: SECURE Act 2.0. Enacted in December 2022, this legislation introduces favorable provisions such as increased catch-up contribution limits and delayed Required Minimum Distributions (RMDs), increasing the appeal and longevity of tax-advantaged retirement accounts.
3. Technology Driver: Fintech & Robo-Advisors. The proliferation of low-cost, user-friendly digital platforms and robo-advisors has lowered the barrier to entry for individuals, making self-management more accessible and appealing than ever before.
4. Cost Constraint: Fee Compression. Intense competition has driven trading commissions to zero at most major brokerages and continues to exert downward pressure on asset-based management fees, forcing providers to compete on scale and ancillary services (e.g., advisory, banking).
5. Market Constraint: Volatility & Risk Aversion. Periods of high market volatility can deter less-experienced investors from self-direction, pushing them toward professionally managed funds and target-date products, thereby reducing the addressable market for pure self-directed platforms.

4. Competitive Landscape

Barriers to entry are High, requiring significant capital for technology, stringent regulatory compliance (SEC, FINRA), and established brand trust to attract assets.

⮕ Tier 1 Leaders * Fidelity Investments: Market leader by AUM; differentiates with a massive scale, an all-in-one financial ecosystem (banking, brokerage, advisory), and zero-expense-ratio index funds. * Charles Schwab: A dominant force post-TD Ameritrade merger; differentiates with a focus on independent financial advisors, strong trading platforms (thinkorswim), and competitive pricing. * Vanguard: Pioneer of low-cost investing; differentiates with its unique client-owned structure, resulting in ultra-low fund expense ratios and a strong reputation for long-term, passive investing.

⮕ Emerging/Niche Players * Betterment / Wealthfront: Leading robo-advisors expanding into self-directed options; differentiate with superior user experience (UX) and goal-based automated investing. * Alto IRA / iTrustCapital: Niche specialists focused on enabling alternative asset investing (e.g., cryptocurrency, private equity, real estate) within IRAs. * M1 Finance: Hybrid platform blending automated "pie-based" investing with self-directed stock/ETF selection, appealing to users who want both automation and control.

5. Pricing Mechanics

Provider revenue is not based on a traditional cost-plus model but is derived from a portfolio of fees. The primary model is an asset-based fee, where the provider charges an annual percentage of the total assets under management (AUM). This is often supplemented by transaction fees, interest income on cash balances, and payments for order flow. For corporate clients, pricing may involve a per-participant recordkeeping fee, though this is often subsidized or waived for plans with significant assets.

The price build-up for the end-user includes direct and indirect costs. Direct costs are account maintenance or advisory fees. Indirect costs, which are more significant, include the expense ratios of the funds (ETFs, mutual funds) held within the account. While trading commissions for stocks and ETFs are now typically zero at major firms, other fees remain.

The 3 most volatile cost elements for providers are: 1. Net Interest Revenue: Income from uninvested cash balances. Highly sensitive to central bank interest rate changes. Recent Fed hikes have increased this revenue stream by est. >300% for many brokerages over the last 24 months. 2. Transaction Volume: Revenue from options trading and other fee-generating transactions. Can fluctuate +/- 20-40% quarter-over-quarter depending on market volatility and retail sentiment. 3. Asset-Based Fees: Revenue tied directly to AUM. A 10% market downturn directly translates to a ~10% reduction in this core revenue stream, assuming no net asset flows.

6. Recent Trends & Innovation

• Expansion into Alternative Assets (2022-2023): A surge in platforms (e.g., Alto IRA) and features from incumbents allowing investors to hold non-traditional assets like cryptocurrency, venture capital, and real estate within their tax-advantaged retirement accounts.
• SECURE 2.0 Act Implementation (Jan 2023 onwards): Providers are actively rolling out new features to comply with and capitalize on the act, including new RMD age calculations, higher catch-up limits, and mechanisms for employer matching of student loan payments into retirement accounts.
• Direct Indexing Goes Mainstream (2022-2023): Major players like Fidelity, Schwab, and Vanguard have launched or acquired direct indexing capabilities. This technology allows individuals to own the individual stocks of an index, offering greater tax-loss harvesting opportunities and ESG customization than a traditional ETF.

7. Supplier Landscape

8. Regional Focus: North Carolina (USA)

North Carolina presents a high-growth, competitive market for self-directed retirement plan providers. Demand is robust, fueled by a strong influx of skilled professionals into the Research Triangle (tech, biotech) and Charlotte (a top-2 U.S. financial center). This demographic is typically higher-income and more financially sophisticated, driving demand for flexible, low-cost retirement solutions. Local capacity is excellent, with major operational hubs for Fidelity (Cary), Vanguard (Charlotte), and the corporate headquarters of TIAA (Charlotte). This intense local competition ensures access to cutting-edge platforms and competitive pricing for corporate and individual clients. The state's stable regulatory environment and favorable business tax climate further support provider operations and market growth.

9. Risk Outlook

10. Actionable Sourcing Recommendations

1. Benchmark Total Cost of Ownership. Initiate an RFI focused on providers' "all-in" cost, including administrative fees, fund expense ratios, and cash-sweep yields. Target a 15% reduction in employee-borne administrative and fund fees by leveraging our plan's scale. Prioritize providers that offer a wide selection of low-cost index funds (<0.05% expense ratio) as default options to maximize employee savings and long-term returns.

2. Negotiate for a Self-Directed Brokerage Account (SDBA) Window. To enhance our benefits package for talent attraction and retention, negotiate to add an SDBA option to our existing 401(k) plan. This meets the demand for greater investment flexibility from sophisticated employees at minimal direct cost to the company. Specify requirements for robust educational tools and compliance guardrails to mitigate risk for novice investors using the feature.