In 2021, the retirement industry will be shaken up by post-pandemic stress, heightened M&A activity, added regulatory nuances, and changing market dynamics. The combined effects of the US’s Securing a Strong Retirement Act, 2020 – typically called the SECURE Act 2.0 – and the Coronavirus Aid, Relief, and Economic Security Act economic stimulus bill – commonly referred to as the CARES Act – will require retirement recordkeepers to focus on the following themes:
- Financial wellness: Financial wellness will be the key mandate around which retirement products will be designed. A greater variety of investment options, and provisions like inclusion of student loan debt repayments into retirement constructs, are some of the focus areas of the SECURE Act 2.0
- Inclusiveness: There is a big push from regulators for greater inclusiveness in retirement plans, including making plans cheaper and easier for SMBs, government employees, and the younger generations. The main highlight of the SECURE Act 2.0 here is mandating auto-enrollment for all new retirement plans
- Pooled Employer Plans (PEPs): PEPs are the new kids on the block, and they’re being presented as a low-cost, low liability product built on digital technologies. The SECURE Act 2.0 has provisions to increase uptake of PEPs by proposing them as an option in 403(b) plans. PEPs will be a hot topic this year, and there will be a definite call on the future of PEPs in 2021
While these and other retirement-focused components of the SECURE Act 2.0 and the CARES Act mean good news for retirement plan beneficiaries, they mean bad news for retirement plan recordkeepers.
The crux of the problem for a majority of recordkeepers are their legacy-oriented proprietary systems. Most of these systems operate on languages such as COBOL and FORTRAN, making the platforms expensive to run and modernize. They are also highly susceptible to the talent crunch for these languages. Many recordkeepers run multiple proprietary platforms due to the high costs and risks associated with IT estate simplification. These age-old legacy recordkeeping systems, and the peripheral systems and integrations built around them, won’t allow recordkeepers to create better experiences for plan sponsors. On top of that, recordkeepers face challenges in integrating these proprietary platforms with third-party solutions that allow faster innovation, increased reliability, improved working methods, and support for emerging technologies such as AI and analytics. A platform-based modernization approach will enable recordkeepers to offer value-added features to plan sponsors.
We believe that as the plan size increases, so does plan sponsors’ demand for value-add services. Recordkeepers need to invest in modernizing their systems to create greater differentiation and win in the market. A modern system will help recordkeepers enhance participant and sponsor engagement, enable efficient utilization of existing infrastructure, ensure regulatory compliance, and build new revenue streams.
Here are four quick-win areas that recordkeepers must address to kickstart their modernization journeys:
- 360-degree payroll integration: This is key for enabling a smooth auto-enrollment experience, setting up PEPs, and reducing the data that sponsors/participants need to submit manually during the annual regulatory and compliance cycle
- Eligibility processing and enrollment systems: Modernizing these systems is critical to ensuring smooth end-of-year compliance testing and making sure no data errors arise from the auto-enrollment process. These systems also play a key role in enabling PEPs
- Digital experience and participant/advisory channels: Modernizing digital experiences and channels will help make customer servicing cheaper and more efficient, and an intuitive digital experience with built-in data pipelines is a key enabler for financial wellness features
- Open investment architecture: This is necessary to offering a wider array of investment options, managed account services, and financial wellness features to sponsors
While cloud-based offerings would help recordkeepers modernize their capabilities, the reality is that most plan administrators cannot fathom the idea of a rip-and-replace approach to modernization.
We believe that IT service providers and technology vendors have picked up the scent of this long pent-up modernization demand and are aligning their strategies and investments to best tap into this segment. We’re seeing both service providers and technology vendors make significant investments across digital platforms, low-/no-code platforms, modular core recordkeeping platforms, and many point solutions aimed at addressing the most pressing issues in the industry. As the supply side builds on its strategy and investments for retirement plan administrators, it will be interesting to see how service providers and technology vendors shape up their value proposition and their go-to-market strategies to best serve retirement plan administrators.
To discover even more insights in the retirement industry, please read our recent research 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 guide our enterprise clients in finding the right service providers and suppliers to suit their needs, we’ll be publishing dedicated research on the technology and service provider landscape for the retirement industry. Service and technology providers interested in being featured in our research should contact [email protected] and [email protected].