The Remaking of the
DC Market
EBRI’s 62nd policy forum
Nancy Szmolyan
[email protected]
212- 446 -7793
May 8, 2008
McKinsey has undertaken an extensive research
effort into the future of the DC market
Over 50 industry interviews to ID
market trends and likely impact
Bottom-up modeling of impact of
market trends
• 10+ Plan sponsors across all
• Detailed modeling of market
segments and plan sizes
• 10+ DC industry experts and
pension consultants
• 30+ industry players including:
– Recordkeepers
– IODC players
– Integrated players
– Insurers
growth and size by 2015 including
‘bottom up’ modeling of flows by tax
segment and by plan size
• Detailed modeling of flows by
asset class including target date
flows, re-allocations, and passive
management trends
• In depth analysis of economics by
player and impact of changes in
default option from stable value to
asset allocation funds
1
Context: A confluence of external forces has led to
the dawn of a new era for the DC market
Description and impact
I. Rapid sponsor
shift from DB
to DC
• Continuing sponsor shift from DB to DC retirement
plans, with 60% of employees having DB-only plans in
1980, declining to 10% in 2004
• Likely reductions in social security benefits and growing
II. Aging
workforce
life expectancy has shifted the risk of retirement to
st
retiring for the 1
individuals and is changing product needs
time on DC
savings
III. Most
fundamental
regulatory shift
in 30-year
history of DC
• 2006 PPA
– Rapid adoption of auto enrollment
– Asset allocation funds as QDIAs
– New opportunities for participant advice solutions
• DOL fee disclosure/Form 5500: more transparent
plan costs, institutional pricing
• 403 regulations: increased fiduciary responsibilities
for sponsors driving
– Reductions in the number of plan providers used
– Lower fees
• DOL 2008 – requirement for index fund option
• Transformation
of DC from a
tax-advantaged,
individual
savings account
market to the
bedrock of US
retirement
• Renewed
interest in DC,
rapid product
development
and
differentiated
strategies and
customer value
propositions
2
A remade DC Market by 2015
3
The changes sweeping the DC landscape imply five profound shifts in the
size and structure of the industry by the year 2015:
1. DC market will nearly double in size to reach $7.8 trillion in AUM –
the largest sector of the retirement market when considering IRA
rollovers from DC plans
2. Asset allocation funds will account for 35% of AUM, share of passive
assets will double
3. Continued shift in industry economics – More than 90% of industry
revenues will be generated by asset management, advice, and the rapidly
growing IRA roll-over market versus traditional recordkeeping
4. A 4-way race between at-scale integrated players, leading insurers,
IODC players and new entrants (e.g., consultants, financial advisors)
to capture advice, asset allocation and retirement income opportunities
5. Accelerated consolidation of DC administrators/record-keepers
The DC market will almost double in the next 10 years
driven by high contributions
DC market projections
$Billions
Drivers are:
Money-in-motion opportunity
for AMs of $6.8T
(~$2.8T in inflows and ~$4.0T
in asset rebalancing)
• Adoption of auto enroll
• DB plan freezing
• Longer time in DC
Inflows +3,840
147
Outflows -3,209
7,825
184
2,663
3,060
3,509
546
4,134
7,825
4,134
2006
DC assets
New
New
New plans
contributions participants
Source: McKinsey DC Model
IRA
rollovers
Other
Asset
2015
withdrawals appreciation DC assets
4
Asset allocation funds are on track to become one of
the most successful innovations in financial services
3 major drivers of
growth:
• Dominance of asset
Share of DC assets
Percent, $Billions
100% = 4,134
5,465
7,825
allocation funds
(target date) as QDIA
• Strong demand from
participants that self
select their
investment option
65
80
Other funds
97
• Switching and remapping of assets
from stable value/
MM funds
Asset allocation
funds
35
20
3
2006
Source: McKinsey analysis
2010E
2015E
5
Passive products are poised to grow significantly in
DC, similar to the trend experienced in DB
Passive share of DB assets*
$Trillions, Percent
Passive share of DC assets
$Trillions, Percent
$7.8
8
$5.5
6
5
$4.7
$3.7
4
$2.3
2
Active /
Other
Passive
69%
71%
79%
$4.1
4
84%
Active /
Other
89%
80%
20%
1995
29%
31%
2001
2006
* Top 200 DB plans (Private and Government)
Source: Pensions & Investment, McKinsey analysis
Passive
11%
2006
16%
2010
21%
2015
6
Economics in the DC industry will be highly skewed
towards Asset management, IRA rollovers and Advice 7
Estimated revenues pools for mega 401(k) plan segment
$Billions
PRELIMINARY
ESTIMATES
$20
5%
8%
5%
24%
Available
to
TPAs
Revenue sharing
Advice
6%
9%
18%
1%
IRA rollover
Asset Management
Available
to
integrated
players
$10
Recordkeeping
58%
66%
2006*
2015**
* Recordkeeping fees is ~4 bps; Revenue sharing fees is 15 bps on 40% of assets; Advisory fees is 35 bps on 1% of assets; Asset Management fees is ~42 bps and
IRA rollover fees is 51 bps (assumed to be 20% higher than asset management fees) on 22.5% of assets (assumed to be the typical capture rate by DC providers)
** Recordkeeping fees is ~3 bps; Revenue sharing fees drop to 10 bps on 50% of assets; Advisory fees remain at 35 bps but share of assets under advisement rises to
10%; Asset Management fees drops to 38 bps because of increased use of separate accounts/commingled trust and although IRA rollover fees drops to ~45 bps
(assumed to be 20% more than asset management fees) the share of IRA rollovers captured goes up from 22.5% to 35% as providers get better at IRA rollovers
Source: McKinsey DC Model; McKinsey analysis
Product innovation moving beyond accumulation
and transition to retirement income products
Annuity based
Income management funds
Hybrid products
IncomeFlex
Personal
PensionBuilder
SponsorMatch
Income Replacement Funds
Clearcourse
Income Advantage
Lifetime
Income
Managed Payout Funds
Premier Income Funds
i4LIFE Advantage
IncomeSolutions
Platform for life
Guarantee
(out of plan)
Preferred
Income Funds
Key questions
• In-plan vs. out of plan options?
• Likely winning products?
Source:Press search
+
Guaranteed
Income for
Life Benefit
8
A wide range of advice models are emerging to
meet the differing needs of plan sponsors
9
EXAMPLES
Small independent
automated tool
providers e.g.:
Managed account
provider eg.:
• Basic financial education
for mass market e.g.:
Independent
Level of independence
Independent advice
providers:
• Specialized HNW /
executive advice
e.g.:
Bundled
Providers e.g.:
Integrated players e.g.:
Salaried worksite
advisory forces e.g.:
DC
provider
Automated, online/
call-center based
Managed accounts
Delivery model
Worksite/
1:1 financial
planning
Consolidation is most likely in the fragmented small
plan segment, where economics are under pressure
The smaller plan segments are much
more fragmented than larger segments…
…creating opportunities for a
consolidator
Plan provider
Percent of AuM, 2005
• Strong distribution (e.g., deep
Top 3
26
28
home office relationships with
selected wirehouses)
• IT & Ops platform flexible enough
32
45
Top 4-10
41
30
54
25
• Partnerships to access or structure
25
29
Others
33
42
43
proprietary default investment
options
30
17
Micro
(<50
participants)
to enable rapid and cost efficient
migration of acquired plans
Small
Medium
(50-250) (2501,000)
Source: Pensions & Investments; Access Research; McKinsey analysis
Large
(1,0005,000)
Mega
(> 5,000)
• Investment underway to develop
transition and income solutions
10
Considerations for the management agenda
11
1.
Is target date the winning structure, or do we expect
emergence of new asset allocation products?
2.
How big will be the share of default products and impact on
the DC industry and players?
3.
Will the trend to unbundled pricing improve the economics
of record-keeping?
4.
What are likely winning income products, will they be in plan
versus out of plan?
5.
Which advice delivery model will offer the best value to
future retirees? Does the answer differ by segment
6.
Is consolidation likely in the small and large plan segment?
The Remaking of the
DC Market
EBRI’s 62nd policy forum
Nancy Szmolyan
[email protected]
212- 446 -7793
May 8, 2008