The leading retirement firms are gearing up to respond to change in client’s financial needs. Firms have seen increase in demand for retirement plan, holistic financial advice, and financial wellness solutions. The change in client needs driven by the latest macro-economic developments such as increasing interest rate, rising inflation, surge in cost of living and prioritising short-term financial need versus long-term retirement savings and investments.
In addition to this SECURE 2.0 regulation introduced significant changes to the retirement savings landscape, including adjustments to the age when required minimum distributions begin, as well as better catch-up contributions aimed at assisting older workers who have failed to meet their retirement savings targets.
Firms are strengthening its retirement products and services to provide affordable financial advisory, enrich digital experience, improvise customer engagement, and offer personalized financial solutions.
Key industry forces
There are multiple factors that are driving the firm to adopt to new realities around retirement savings and investments. Some of the key factors are discussed below.
Government policy changes, industry specific regulations and geopolitical events have an impact on the business outlook, and it cascades to investment performance. For example, the impact of ongoing Russia-Ukraine war is highly visible on global economy specially in the energy and food sector. As the crisis unfolded the investors witnessed a volatility in the investments that had direct or indirect exposure to Russia.
Factors such as rising inflation, cost of living, recession fear, have further diminished the retirement saving outlook. According to U.S. Labor Department, the annual inflation rate for the United States was 3.7% for the 12 months ended August 2023. This follows a rise of 3.2% in the previous period.
According to Protected Retirement Income and Planning (PRIP) study 2023, more than half of Americans between the age of 45 and 75 years saying they do not have enough retirement savings to last their lifetime, and almost a third saying they are not confident they will have enough to cover basic monthly expenses.
The J.D. Power 2023 U.S. Retirement Plan Digital Experience Study, 34% of retirement plan participants providing highest rating for their digital experience have rolled over money from other retirement accounts, compared with just 20% among clients who give their retirement plans poor ratings on their digital experience.
The Schroders 2022 U.S. Retirement Survey suggests that 74% of defined contribution plan participants are not aware of ESG investment options in their plan, and they might increase their contribution rate if offered ESG options. This is up from 69% who said the same in 2021.
The majority (87%) of plan participants said they want their investments to be aligned with their values. They also see ESG as a driver of performance: 78% said they believe companies that are ESG focused will have better results over time than companies not socially responsible.
The SECURE 2.0 Act of 2022 designed improve retirement savings options. Broadly, it targets to make it more attractive for employers to offer retirement plans and improve retirement outcomes for employee. The key provision includes automatic enrolment requirement, required minimum distributions, catch-up contributions, long-term, part-time employee eligibility.
The array of industry forces has multiple business implication on the firms providing retirement plan services. First and foremost is to build capabilities to offer low-cost affordable digital advisory with an optional advisor access available at premium fee, transform the customer experience by providing frictionless digital journey across OMNI channels (primarily mobile apps) with access to comprehensive suite of retirement tools and calculators, scenario simulators, self-service capabilities.
Firms are further enriching the digital capabilities to offer hyper personalized products and services across the client touch points and generate actionable recommendations based on client’ holistic financial profile. Firms are also expanding product offerings by providing access to alternative investments.
Firms have expanded the capabilities to offer value added services such as financial wellness, tax planning, health care planning and estate planning.
For many firms capitalizing on the IRA rollovers is part of key growth strategies, given it enables the firms to offer financial planning and wealth management services to clients. The IRA assets remain the largest segment of the retirement market and asset growth in the IRA market is attributed to rollovers from the DC plans.
Digital core transformation
More than half of firms are still using legacy based platforms to support its retirement business and operations. The technology constraints restrict the firm from building new capabilities & features, offering value-added services, launching new investment products, realise the potential of ecosystem players & fintech partnership. Firms embarking upon technology modernization initiatives to reduce time to market, embrace microservices based open architecture, leverage intelligent automation, and harness power of cloud computing to increase efficiency and reduce the operating cost. It allows the firms to strengthen the digital tech stack and offer compelling customer experience at affordable cost.
Firms have embarked on multiple transformation journeys to address the clients’ demand for digital services and transparent advisory fee models, to realign products & services as per SECURE 2.0 regulation and to leverage technology to increase efficiency.
Firms are widely focusing upon digitally enabled business models for growth and transformation agenda. Firms must evaluate multiple themes based on their strategic priorities, products & services catalogue, and technology landscape. A firm must explore unique use cases that are highly contextual to its strategic business priorities and capabilities. A select industry level examples are highlighted here for quick reference.
Enrich digital experience with self-service capabilities.
Best-in-class digital experience remains at the core of elevating overall customer satisfaction. Clients see digital value proposition as a strong differentiator and tend to stay with the retirement service provider in the event of a job change. Retirement plans mobile apps have witnessed significant increases in adoption and continue to drive higher levels of customer satisfaction.
TIAA has launched a new mobile experience that allows participants to manage their retirement plans. It allows clients to securely enroll in their plans, change contribution, set investment strategy, and update personal details. It also provides recommendations for participants who may need guidance along the way. The extended capabilities built on leading digital assistants such as Alexa and Siri, includes personalized account information, such as balance inquiry for retirement, TIAA Bank and brokerage, tax updates, and advisor and office location lookups.
Building hybrid digital advisory
Charles Schwab is offering a digital platform “Online Financial Planning Action Centre” that combines guidance by human advisor and technology to elevate the financial planning experience. Client can access this service after creating the customized financial plan based on their unique financial situation and goals. The key feature includes a digital dashboard where the advisors can recommend next steps and create deadlines to help clients stay on track for example increasing monthly retirement savings by a target amount.
Focus on value added services.
Investors are looking beyond basic retirement plan service and demanding for ongoing holistic guidance to meet short-term and long-term financial goals, tax planning, health care planning, estate planning etc. Firms are focusing on offering value added services to provide personalised financial planning and advisory services to retirement clients. One of the focus areas is to offer financial wellness tools and resources to help investors with different goals—whether that’s managing cash flow, saving up to buy a home, or paying off debts.
T. Rowe Price has built a smart savings app ‘Waysaver’ and it provides an easy, secure, and automatic way for employees to create an emergency savings fund. It offers deep understanding of savings patterns and participant behaviour, adapts as patterns change, and allows the employee to fully control and access funds as needed. It allows employees to create saving goals, and a deposit account for automatic contributions. The firm had entered a strategic partnership with Galileo Financial Technologies to provide cloud-based digital platform and program management services.
Hyper personalization & actionable insights
Voya has launched a digital platform “myVoyage” to provide personalized financial-guidance and connected workplace-benefits. It provides a consolidated account view (including external account aggregation) and using data-driven insights to offer personalized guidance to help clients make progress toward achieving their financial goals. Other features include holistic financial wellness, medical claims, and access to financial professional.
Alternative investment product
Fidelity has launched “Digital Assets Account (DAA)”, it is the industry’s first offering that provides employees the option to access digital asset investments. Fidelity provides holistic digital asset services that includes fully integrated retirement plan, secure custody platform, comprehensive educational materials.
Firms must embark upon digital transformation journey to elevate customer experience, offer highly personalised products and value-added services at affordable cost, modernize legacy applications, automate manual business processes, increase operational efficiency, and leverage ecosystem partnerships. It will allow the firms to remain agile in constantly evolving business environment and drive business growth by differentiating themselves from the competition.