Download - The Remaking of the DC Market
The Remaking of the DC Market
May 8, 2008
EBRI’s 62nd policy forum
Nancy Szmolyan
[email protected] 446 -7793
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McKinsey has undertaken an extensive research effort into the future of the DC market
Bottom-up modeling of impact of market trendsBottom-up modeling of impact of market trends
Over 50 industry interviews to ID market trends and likely impactOver 50 industry interviews to ID market trends and likely impact
• 10+ Plan sponsors across all segments and plan sizes
• 10+ DC industry experts and pension consultants
• 30+ industry players including:
– Recordkeepers
– IODC players
– Integrated players
– Insurers
• 10+ Plan sponsors across all segments and plan sizes
• 10+ DC industry experts and pension consultants
• 30+ industry players including:
– Recordkeepers
– IODC players
– Integrated players
– Insurers
• Detailed modeling of market 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
• Detailed modeling of market 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
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Context: A confluence of external forces has led to the dawn of a new era for the DC market
III. Most fundamental regulatory shift in 30-year history of DC
III. Most fundamental regulatory shift in 30-year history of DC
I. Rapid sponsor shift from DB to DC
I. Rapid sponsor shift from DB to DC
II. Aging workforce retiring for the 1st time on DC savings
II. Aging workforce retiring for the 1st time on DC savings
Description and impact
• 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
• Likely reductions in social security benefits and growing life expectancy has shifted the risk of retirement to individuals and is changing product needs
• Continuing sponsor shift from DB to DC retirement plans, with 60% of employees having DB-only plans in 1980, declining to 10% in 2004 • 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
• 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
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A remade DC Market by 2015
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 $7.8 trillion in AUM – the largest sector of the retirement market when considering IRA rollovers from DC plans
2. Asset allocation funds will account for 35% of AUM, share of passive assets will double
3. Continued shift in industry economics – More than 90% of industry revenues will be generated by asset management, advice, and the rapidly growing IRA roll-over market versus traditional recordkeeping
4. A 4-way race between at-scale integrated players, leading insurers, IODC players and new entrants (e.g., consultants, financial advisors) to capture advice, asset allocation and retirement income opportunities
5. Accelerated consolidation of DC administrators/record-keepers
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DC market projections$Billions
The DC market will almost double in the next 10 years driven by high contributions
Source: McKinsey DC Model
4,134
4,134
2006
DC assets
3,509
New contributions
147
New participants
184
New plans
2,663
IRA
rollovers
546
Other withdrawals
3,060
Asset appreciation
7,825
7,825
2015
DC assets
Inflows +3,840 Outflows -3,209
Drivers are:• Adoption of auto enroll• DB plan freezing• Longer time in DC
Money-in-motion opportunity for AMs of $6.8T
(~$2.8T in inflows and ~$4.0T in asset rebalancing)
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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 allocation funds (target date) as QDIA
• Strong demand from participants that self select their investment option
• Switching and re-mapping of assets from stable value/MM funds
Source: McKinsey analysis
Share of DC assetsPercent, $Billions
Other funds
Asset allocation
funds
100% =
97
3
4,134
2006
80
20
5,465
2010E
65
35
7,825
2015E
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Passive products are poised to grow significantly in DC, similar to the trend experienced in DB
* Top 200 DB plans (Private and Government)Source: Pensions & Investment, McKinsey analysis
Passive share of DB assets*$Trillions, Percent
Passive share of DC assets$Trillions, Percent
4
5
2
Active /
Other
2006
31%Passive
20011995
71%
69%
20%29%
80%
6
2010
21%
Active /
Other
Passive
79%
11%
89%
4
2006
8
2015
16%
84%
$2.3
$3.7
$4.7$4.1
$5.5
$7.8
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Economics in the DC industry will be highly skewed towards Asset management, IRA rollovers and Advice
* Recordkeeping fees is ~4 bps; Revenue sharing fees is 15 bps on 40% of assets; Advisory fees is 35 bps on 1% of assets; Asset Management fees is ~42 bps and IRA rollover fees is 51 bps (assumed to be 20% higher than asset management fees) on 22.5% of assets (assumed to be the typical capture rate by DC providers)
** Recordkeeping fees is ~3 bps; Revenue sharing fees drop to 10 bps on 50% of assets; Advisory fees remain at 35 bps but share of assets under advisement rises to
10%; Asset Management fees drops to 38 bps because of increased use of separate accounts/commingled trust and although IRA rollover fees drops to ~45 bps (assumed to be 20% more than asset management fees) the share of IRA rollovers captured goes up from 22.5% to 35% as providers get better at IRA rollovers
Source: McKinsey DC Model; McKinsey analysis
Estimated revenues pools for mega 401(k) plan segment$Billions
6%9%
1%18%
66%
$10
2006*
5%
8%
5%
24%
58%
$20
2015**
Recordkeeping
Revenue sharing
Advice
IRA rollover
Asset Management
Available to
TPAs
Available to
TPAs
Available to
integrated players
Available to
integrated players
PRELIMINARY ESTIMATES
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Product innovation moving beyond accumulation and transition to retirement income products
Source: Press search
Annuity based Income management funds Hybrid products
Key questions• In-plan vs. out of plan options?• Likely winning products?
IncomeFlex
Clearcourse
Income Replacement Funds
Managed Payout Funds
SponsorMatch
Guaranteed Income for Life BenefitIncome Advantage
Personal PensionBuilder
IncomeSolutions Platform for life Guarantee (out of plan)
i4LIFE Advantage
+
Lifetime IncomePremier Income Funds
Preferred Income Funds
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A wide range of advice models are emerging to meet the differing needs of plan sponsors
EXAMPLES
Automated, online/call-center based
Delivery model
Managed accounts
DC provider
Level of
ind
ep
en
den
ce
Indepen-dent
Bundled Providers e.g.:
Integrated players e.g.:
Small independent automated tool providers e.g.:
Managed account provider eg.:
Worksite/1:1 financial
planning
Salaried worksite advisory forces e.g.:
Independent advice providers:
•Basic financial education for mass market e.g.:
• Specialized HNW / executive advice e.g.:
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Consolidation is most likely in the fragmented small plan segment, where economics are under pressure
Source:Pensions & Investments; Access Research; McKinsey analysis
Plan providerPercent of AuM, 2005
26
41
33
Micro(<50 partici-pants)
28
43
Medium
(250-1,000)
45
25
30
Large
(1,000-5,000)
54
32
Small
(50-250)
42
30
29
17
Mega (> 5,000)
Top 3
Top 4-10
Others
25
The smaller plan segments are much more fragmented than larger segments…
…creating opportunities for a consolidator
• Strong distribution (e.g., deep home office relationships with selected wirehouses)
• IT & Ops platform flexible enough to enable rapid and cost efficient migration of acquired plans
• Partnerships to access or structure proprietary default investment options
• Investment underway to develop transition and income solutions
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Considerations for the management agenda
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?
1. Is target date the winning structure, or do we expect emergence of new asset allocation products?
The Remaking of the DC Market
May 8, 2008
EBRI’s 62nd policy forum
Nancy Szmolyan
[email protected] 446 -7793