The retirement savings gap in the US – meaning the difference between the amount of money people should have and actually do have to retire on – stands at around US$40 trillion currently. To put this number into perspective, it is roughly 187 percent of the US GDP and 124 percent of US retirement asset holdings. Dwindling revenues for retirement plan administrators due to fee compression, high costs for servicing retirement plan participants, and the COVID-19 crisis are exacerbating the gap. And participant experience has degraded over the years, leading to inadequate savings for retirement and making the shortfall grow continuously.
Recordkeeping businesses in the Defined Contribution (DC) space are particularly struggling in the current environment. They’re facing multiple challenges, including: an influx of regulatory requirements involving fiduciary responsibilities; sustained low interest rates; pandemic-induced uncertainty; legacy technology systems; increasing costs; and the lack of agility to respond to customer demands and compliance requirements.
Our recently-published report, Making a Business Case for Modernizing Core Systems for the US Retirement Industry: Value Beyond Cost Savings from a Cloud-enabled Recordkeeping System, identified that the root cause behind profitability and customer experience issues for recordkeepers is the high incidence of home-grown, legacy, and mainframe-based recordkeeping systems. Eight of the top 10 US DC recordkeepers, which hold 73 percent of the total DC assets and serve 66 percent of plan participants, are on custom-built recordkeeping systems that are predominantly mainframe-based. The high cost of running and maintaining these systems has bulked up recordkeepers’ total cost of ownership and squeezed their operating margins. Additionally, these systems have not been able to respond quickly to constantly evolving and complex compliance mandates such as ERISA, Section 404(C), Secure Act, and the Department of Labor’s (DOL) fiduciary rule. These challenges are causing a host of fines, lawsuits, and sanctions from the Internal Revenue Service and DOL. Further, there is an acute talent crunch in servicing these systems for recordkeepers.
What should recordkeepers do to combat these challenges?
They need to design cogent strategies to modernize their plan administration systems. A cloud-first core platform is at the heart of this modernization. From a cost savings standpoint, taking a cloud-first core platform approach can effectively halve the technology and operations cost base. On an annual basis, this change results in a cost yield of roughly 20 percent.
The benefits of modernization extend far beyond cost savings as it entails use of a combination of technology levers to improve the plan participant experience. Modernization:
- Enables migration to the cloud, which enables adoption of analytics tools for plan providers to better identify each participant’s financial wellness needs, optimize plan management, and redesign plans to deliver competitive retirement options. And analytics can help maximize the return on investment through predictive trend analysis of investment options
- Helps recordkeepers integrate automation solutions to improve retirement applications processing speed, enhance efficiency in managing participant transactions, and reduce manual interventions in plan administration tasks
- Allows recordkeepers to employ agile solutions for better and quicker compliance with regulations, to quickly meet participants’ needs, and improve the agility of recordkeeping applications
- Lets recordkeepers offer self-service tools to manage contributions and investment allocations, AI-based robo-advisory solutions to address plan participant questions quickly and drive personalized plan recommendations, and a digital UI/UX to simplify the participant enrollment process while improving customer experience
- Enables recordkeepers to expand services scope in the investment advisory and asset management space, which can unlock new revenue sources and lets them subsidize their recordkeeping costs through provision of these ancillary services.
The benefits of modernization of recordkeeping systems to a microservices-based, data-driven, cloud-first core platform cannot be overemphasized. Driving down costs and improving the participant experience will play a critical role in helping recordkeepers survive the pandemic and thrive in the next normal. Using the pandemic as a catalyst to modernize plan administration systems will not only make recordkeeping businesses resilient for the future, but also help support the nation’s retirement readiness and narrow the retirement savings gap.
To learn more about the dire need for transformation in the retirement industry, please see our new report titled “Making a Business Case for Modernizing Core Systems for the US Retirement Industry: Value Beyond Cost Savings from a Cloud-enabled Recordkeeping System.” And to drill down even further, please reach out to the report authors, [email protected], [email protected], and [email protected].