The defined contribution (DC) retirement market remains one
of the highest-growth markets in the financial services industry, with assets
under management close to $9 trillion at the end of 2019, at 8% compound annual
growth rate from 2018. That said, this market is not immune to the disruption
and uncertainty caused by the COVID-19 pandemic, with plan sponsors evaluating
cost-cutting mechanisms and participants who have lost jobs using retirement
accounts to cover income shortfalls.
Prior to the pandemic, the industry witnessed immense
pricing pressure from asset concentration in interest rate products and
subsequent decreased margins from a continued low interest rate environment
followed by lower proprietary fund adoption for new deals. This has resulted in
recordkeepers having to look beyond asset acquisition and into either M&A
or providing products across other adjacent financial needs of their
participants.
The COVID-19 pandemic has placed enormous strain on plan
sponsors and their employees, with the U.S. unemployment rate ballooning to
14.7% in April. Congress has responded with the Coronavirus Aid, Relief and
Economic Security (CARES) Act, which includes providing access to retirement
funds.
Altogether, we see that the retirement industry and
participants are faced with several of these questions as they look towards
recovery from this pandemic:
While certain provisions of the CARES Act are intended to
help participants utilize their retirement savings, the DC industry is
positioned to play a critical balancing act between administering relief
provisions and educating employees on the long-term financial impact of any
rushed decisions on distributions.
How can recordkeepers respond to evolving participant needs?
A recent pre-pandemic survey suggests 40% of the U.S.
population cannot afford an emergency expense of $1,000 from their current
savings.
As job losses and reduced pay resulting from COVID-19 mount,
desperate participants may look to retirement savings to close the income gap.
Many recordkeepers have acted quickly to enhance processes and systems that
facilitate financial access and provide fee waivers to ease financial impact.
With the CARES Act enabling plan sponsors to distribute
funds without penalty, increase maximum loan limits, and waive minimum
distribution requirements, this also provides an opportunity to educate
participants about the impact of retirement asset leakage while providing
alternatives for their short-term financial needs.
Recordkeepers that have invested in digital self-service
technologies, automation, and process optimization can better serve customers,
particularly when service requests are simple/ transactional in nature. These
companies can drive customer value by delivering tailored services and
information to customers needing assistance. Building intuitive experiences
that do not overwhelm participants will be a key driver to the impact and
adoption of new capabilities.
Did you know: A study by the Center for Retirement Research
at Boston College predicts that early withdrawals may reduce overall 401(k)
assets by 25% on average, demonstrating the detrimental impact of early withdrawals
against overall retirement income.
Holistic wellness addresses underserved needs and
opportunity to drive lifetime customer value
One in three Americans is experiencing high levels of
psychological strain during this pandemic. To care for their participants,
recordkeepers and plan sponsors should provide education on the long-term
impact of early withdrawals in this volatile market, providing alternative
strategies when possible. Investing in decision support tools and robust data
infrastructure will help recordkeepers utilize this opportunity to educate and
drive holistic wellness for retirement plan participants.
While many recordkeepers recognize the need and opportunity
for holistic wellness programs, few have successfully delivered, as they
struggle to implement solutions, impeding their ability to develop a lifelong
relationship with their participants, including:
- Partnering with best-in-breed product providers
to deliver tailored and holistic customer experience.
- Developing an interactive educational
curriculum.
- Migrating to digital participant and sponsor
communication (mobile and e-mail) from traditional paper methods.
- Creating a seamless, integrated, and customized
platform-based user experience, fueled by big data.
- Providing financial wellness tools as part of
standard offering to increase product access.
What are key digital capabilities recordkeepers can invest
in to better serve participant needs?
- Digital payments: Drive adoption of electronic
payment methods to improve speed and security of disbursements.
- Paperless participant communications: Develop a
structured print strategy and program to reduce print footprint and costs.
- Digital self-service: Build resiliency with
strong digital self-service capabilities and evolve operating models
positioning human contact as higher value consultative conversations.
- Bespoke education: Curate access and distribution
of educational and sales material based on participant persona and preferences.
How can recordkeepers respond to immediate sponsor needs?
The pandemic has forced many plan sponsors to examine
cost-cutting mechanisms to stay profitable. A study indicates that 37% of
companies are likely considering either suspension or reduction of contribution
matches to improve short-term economics.
Recordkeepers that proactively identify plan trends and
provide tools to conduct plan design impact assessments will help sponsors tie
actions to plan and participant outcomes.
Plan sponsors also recognize their key role in maintaining
employee wellness and understand the consequences of not doing so. In fact, 200
million-plus workdays are lost annually due to mental health issues, resulting
in approximately $17 billion in employee productivity loss.
Prior to COVID-19, the retirement industry had begun efforts
to include various financial products like emergency savings, student loan
assistance, and Health Savings Accounts as part of retirement plan design.
While these products are critical to the long-term financial success of
participants, they should be carefully rolled out to avoid overwhelming
sponsors (and participants). A simplified product offering combined with relevant
background and educational support will help sponsors make informed decisions.
What can recordkeepers double down on to engage effectively
with sponsors in the new normal?
Virtual education: Leverage scalability, repeatability, and
cost advantage of virtual consultative advice.
Financial wellness product adoption: Build curated financial
wellness product bundles for Sponsors based on participant demographics.
Simpler workflows: Add online forms and e-signature to
replace physical forms to enhance speed of service.
Digital self-service interactions: Add or enhance
self-service capabilities so plan sponsors can effficiently and
accurately service their own requests..
Key success factors for an effective transformation
Recent trends in the retirement industry, such as pricing pressure,
increased transparency, and the focus on ease of doing business, have motivated
recordkeepers to invest in digital transformation. The 2008 Great Recession
changed the banking industry and led to the growth in digital banking and
leaner operations.
As customers today open bank accounts, they are looking
beyond traditional levers such as branch presence or ATMs to digital
experiences. The COVID-19 pandemic may result in many such inflection points.
Utilizing this time to setup an agile and transformative culture will enable
quick response to customer needs and ultimately greater profitability. While
the desire to make transformative changes is universal, the ability to do so
can vary greatly by institution.
Challenges and opportunities for recordkeepers to
differentiate through transformation
Future-back digitization: Retrofitting a digital strategy
based on current operating models and customer needs will limit the
organization’s ability to respond to unforeseen market changes. Digital leaders
should play a critical role in defining the business vision and strategize to
bridge the gap between current and emerging needs of both the company and its
customers.
Simplify to digitize: Insufficient and imbalanced
simplification of end-to-end processes across the value chain can lead to
unsatisfying customer experiences. Establishing process accountability and
balancing the need for operational efficiency with customer experience will set
up a strong foundation for digitization and customer growth.
Scaled agile transformations: Speed (and success) of change
is strongly correlated with innovative companies, enabling competitive
advantage and the agility to respond to evolving customer needs. Due to their
inherent scale and complex organizational structures, large companies struggle
to rebuild new foundations for customer-centric productivity. Business leaders
can share control on existing siloed transformation agenda, shifting to an
agile multidisciplinary transformation fueled by rapid prototyping, design thinking,
and lean concepts.
Know your data: Prioritizing the customer needs and curating
customer experiences is only possible with robust data infrastructure. Guiding
participants through their financial journey, or sponsors through their
participants’ benefit journeys, requires rigor and discipline around data
quality and integrity. Recordkeepers should be mindful of machine-learning
biases that may result in improper customer profiling and preferential
marketing.
Strategic and purposeful employee engagement: Happy
employees lead to happy customers. Deliberate efforts to manage employee
expectations can be a critical success factor in turning the current crisis
into a rapid transformation opportunity. Managers across the organization
should help incentivize and align employees’ goals to specific outcomes aligned
to the organization’s future of work-model implementation and execution.
Transcending the status quo mindset: Organizations often
face behavioral challenges when implementing rapid transformations.
Implementing a robust change management program that includes socializing a
clear vision, designing strong accountability structures, and developing open
communication channels will empower middle-management teams to drive and
sustain transformational change with the benefit of employee buy-in.
While the need for transformation across the retirement
industry is undeniable, all recordkeepers have obstacles to overcome in their
journey. A comprehensive strategy, investment, and transformational mindset around
product innovation, digital customer experiences and intelligent automation can
build more profitable and sustainable business models for the future.
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