Article
Is your retirement plan committee thinking about doing an RFP for recordkeeping services? This article provides insights into that industry, how it’s evolved, and what to expect in the future.
The defined contribution (“DC”) plan recordkeeping industry plays a crucial role in managing retirement savings in 401(k) and 403(b) plans for millions of employees across various companies in the United States. The industry responsible for recordkeeping encompasses the administrative and technological infrastructure necessary to manage these plans efficiently.
While the DC plan recordkeeping industry has made significant progress, several challenges and trends are likely to shape its future.
The Recordkeeping Industry is Changing
The DC plan recordkeeping industry has witnessed significant growth and transformation over the years, driven by factors such as technological advancements, regulatory changes, consolidation, revenue for the players, and shifts in retirement trends. Here are some key aspects of the industry:
- Technology and Innovation:Technology has been a driving force in reshaping the industry. Advanced recordkeeping platforms have emerged, offering features such as online access to account information, mobile apps for managing contributions, and tools for retirement planning. Automated services, including robo-advisors and personalized investment advice algorithms, have gained traction, allowing participants to receive tailored investment recommendations based on their risk tolerance and retirement goals.
- Regulatory Environment: The regulatory landscape significantly impacts the industry. Regulations from entities such as the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) dictate the standards for plan administration, investment options, and participant disclosures. The introduction of enhanced fiduciary rules and other regulatory changes has prompted plan sponsors and recordkeepers to adapt their practices to ensure compliance.
- Consolidation: The industry has experienced consolidation, with larger financial institutions acquiring smaller recordkeeping firms to gain a competitive edge and expand their service offerings. This consolidation trend has been driven by the need for economies of scale to manage the increasing complexities of compliance, technology investments, and customer service.
- Fee Transparency: Fee transparency has become a significant focus, driven by increased scrutiny on plan costs and the potential impact on participants’ retirement savings. Regulatory efforts, such as fee disclosure requirements, have prompted greater transparency in how fees are assessed and disclosed to participants.
- Participant Engagement: Recordkeepers have invested in improving participant engagement through educational resources, personalized communications, and retirement planning tools. The goal is to help participants make informed decisions about their investments and retirement goals.
- Customization and Personalization: The industry has moved toward offering more customizable and personalized solutions. Participants now have access to a range of investment options, allowing them to tailor their portfolios based on risk tolerance, investment preferences, and time horizon.
In light of the pace of change in the recordkeeping community, plan committees that fail to stay abreast increase the risk of losing the race to transform their retirement plans as innovations unfold.
Challenges and Future Outlook
While the DC plan recordkeeping industry has made significant progress, several challenges and trends are likely to shape its future.
- Regulatory Changes: Ongoing changes in regulations will continue to impact how plans are administered, how fees are disclosed, and how participants receive retirement advice. Keeping up with these changes will be crucial for recordkeepers and plan sponsors.
- Digital Transformation: Technology will continue to play a pivotal role. Innovations such as artificial intelligence and machine learning could enhance participant education, investment strategies, and administrative efficiency.
- Retirement Readiness: Ensuring participants are financially prepared for retirement will remain a focus. The industry will likely emphasize education, tools, and advice to help participants make better decisions about contributions and investments.
- Fee Compression: Pressure on fees is expected to persist. As more participants and plan sponsors demand transparency and cost-effective solutions, recordkeepers will need to balance service quality with cost considerations.
- Cybersecurity: With the increasing reliance on digital platforms, cybersecurity will become even more critical. Recordkeepers will need to invest in robust security measures to protect participants’ sensitive personal and financial data.
- Evolving Demographics: The industry will need to address the retirement needs of diverse demographic groups, including millennials and Generation Z. Tailoring services to different age groups and life stages will be important.
The DC plan recordkeeping industry has evolved significantly, driven by technological advancements, regulatory changes, and a growing emphasis on participant outcomes. While challenges exist, opportunities for innovation and improved retirement outcomes are abundant, making this industry a dynamic and critical component of the broader retirement landscape.
Enhance Your Resources
Many organizations lack the time and internal resources necessary to manage the selection of a plan service provider and conduct retirement plan evaluations. An unbiased expert can help by ensuring that an RFP is executed smoothly and that it produces relevant and accurate results.
