The $5 Trillion Financial Planning Opportunity ‘Hiding in Plain Sight’

An enormous chance to serve investors.

(Michele Limina/Bloomberg)

(Michele Limina/Bloomberg)

Fee pressure, underfunded plans, and an aging population are inevitably altering the U.S. retirement system and jeopardizing the future of some companies that service it. But there is still tremendous opportunity for firms — and financial advisors — capable of adapting and better serving plan participants.

Defined contribution and IRA revenue growth is decelerating as fees are forced lower, threatening the profitability of U.S. retirement firms; average 401(k) expense ratios have fallen by a third over the past 10 years, according to a new PwC report. Asset managers are not the only companies facing fee pressure. Recordkeeping fees are also on a downward trajectory, declining 8% between 2015 and 2019, an analysis by PwC revealed.

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But tens of millions of U.S. workers don’t have access to a retirement plan, or don’t use one available to them, and companies that can remedy that have much to gain.

“While these pressures have forced some retirement firms to consolidate or exit, there’s an opportunity hiding in plain sight. Firms that focus on the evolving needs of participants by addressing individual challenges with new benefit offerings and holistic advice can increase participation. Access to retirement programs can also improve through lower cost turnkey programs specifically designed for small business which, in total, we estimate can unlock an additional $5 trillion in retirement assets,” PwC’s report says.

Financial planning is one of the most popular services plan sponsors are adding. Research has shown that only about 5% of employees meet all criteria of “financial wellness” and many are interested in professional advice or planning. But most employees don’t qualify for traditional wealth management relationships because they don’t have enough to invest. Without a plan sponsor offering some level of financial planning, many employees might forgo it (although some RIAs charge flat annual fees, which has proved popular with investors).

Many companies are already making an effort to do this, including through mergers and acquisitions to achieve scale. Captrust, which manages $60 billion and is one of the largest retirement plan advisors overseeing more than $600 billion, acquired competitor Cammack Retirement Group in February.

On March 15, private equity giant Warburg Pincus struck a deal with Edelman Financial Engines, valuing one of largest RIAs at more than $7 billion, as it increasingly works to deliver retirement plan participants with more holistic financial advice.

“We are all seeing a large amount of consolidations/exits, but there are a number of players rethinking their strategy and re-entering the space with a revamped approach,” Aaron Schumm, the founder and CEO of 401(k) & defined contribution plan software firm Vestwell, told RIA Intel. “There is a renewed focus to engage in the workplace at a high-scale with modern technology, creating an end-to-end, low-cost way to engage with employers and employees.”

Americans are underprepared for retirement, especially considering rising life expectancies and increasing healthcare costs.

A quarter of them have no retirement savings and barely one third who are saving feel they are on track. Many will fall short of their goals.

PwC estimates the median retirement savings account of $120,000 for those approaching retirement (age 55 to 64) will likely provide less than $1,000 per month over a 15-year span. “That’s hardly enough,” the report said.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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