The Remaking of the DC Market. EBRI’s 62 nd 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.
Over 50 industry interviews to ID market trends and likely impact
Bottom-up modeling of impact of market trends
I. Rapid sponsor shift from DB
II. Aging workforce retiring for the 1st time on DC savings
III. Most fundamental regulatory shift in 30-year history of DC
The changes sweeping the DC landscape imply five profound shifts in the
size and structure of the industry by the year 2015:
4,134 of a new era for the DC marketThe DC market will almost double in the next 10 years driven by high contributions
Source: McKinsey DC Model
100 of a new era for the DC marketAsset allocation funds are on track to become one of the most successful innovations in financial services
Source: McKinsey analysis
5 of a new era for the DC marketPassive 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
10 of a new era for the DC marketEconomics in the DC industry will be highly skewed towards Asset management, IRA rollovers and Advice
Estimated revenues pools for mega 401(k) plan segment
Available to integrated players
Available to TPAs
* 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
Source: Press search
17 differing needs of plan sponsorsConsolidation is most likely in the fragmented small plan segment, where economics are under pressure
Source: Pensions & Investments; Access Research; McKinsey analysis
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?