Displaying items by tag: 401k

The US defined contribution (DC) retirement industry, once buoyed by steady asset growth and strong equity markets, now faces a profitability squeeze due to fee compression, demographic shifts, and intensifying competition. As baby boomers retire and withdrawals surpass new contributions, the system is experiencing net outflows, pushing providers to rethink their business models. 

Recordkeepers are seeing administrative fees decline significantly and are increasingly relying on ancillary revenue streams—like brokerage accounts and financial advice—to offset shrinking margins. 

While total DC system revenues rose modestly between 2013 and 2023, the real surge came from retail wealth management, which generated $45 billion in new revenues, reflecting a shift toward participant-centric strategies. Providers are also contending with rising technology and support costs, prompting restructuring, digitization, and outsourcing, even as consolidation gives larger firms scale advantages. 

Finsum: Retirement solutions providers are being forced to adapt quickly, with success increasingly tied to their ability to expand beyond recordkeeping.

Empower, the $1.8 trillion 401(k) plan provider, will begin offering private credit, equity, and real estate investments in some retirement accounts later this year through partnerships with firms like Apollo and Partners Group. 

This move marks the largest entry yet of private assets into 401(k)-type plans, a $12.4 trillion market that Wall Street firms have long sought access to. While proponents argue private assets can enhance returns and reduce volatility, challenges remain—such as illiquidity, valuation complexity, and higher fees, which range from 1% to 1.6% versus the 0.28% average for typical target-date funds. 

Only select managed account services will offer these investments, with five employers already signed up to participate in the initial rollout. Allocations could range from 5% to 20% of a portfolio, depending on factors like age and risk tolerance.

Finsum: Private markets have definitely gone wide in the last decade but this sort of expansion could really help retirees. 

Plan sponsors continue to grapple with low engagement and limited financial literacy when it comes to retirement income within defined contribution plans, according to a new DCIIA study. Many employers are hesitant to implement retirement income solutions due to competing priorities, legal risks, and a lack of internal resources or formal decumulation strategies. 

Complexity, lack of standardization, and concerns over liquidity and portability further complicate adoption. However, plan sponsors anticipate growing interest in lifetime income options through 2025 and 2026, especially as peer adoption increases. 

Safe harbor provisions from SECURE 2.0 are expected to encourage adoption by reducing perceived legal liability, and DCIIA will expand its research later this year to better understand these barriers and opportunities.

Finsum: Solutions that offer personalization, flexibility, and simplicity are most appealing, though widespread uptake may hinge on stronger education and clearer evaluation tools.

Target-date funds are designed for investors with a specific retirement date in mind, automatically adjusting their investment mix to become more conservative as that date approaches. 

These funds typically hold a variety of mutual funds rather than individual stocks or bonds, making them a diversified “fund of funds” that simplifies asset allocation. Early in an investor’s career, target-date funds emphasize growth by leaning heavily on equities, then gradually shift toward bonds to preserve capital as retirement nears. 

Each fund follows a predetermined glide path, which guides the transition from aggressive to conservative investments over time. Investors benefit from a hands-off approach, as the fund handles rebalancing and risk adjustments without the need for active management. 

Finsum: Overall, target-date funds offer a convenient, age-based solution that combines diversification, risk control, and simplicity in a single investment vehicle.

Morningstar’s latest Retirement Plan Landscape report finds that while the average cost of workplace retirement plans continues to decline, expenses still vary significantly—especially for those in smaller plans, who often pay nearly three times as much as participants in large plans. 

These cost discrepancies stem largely from economies of scale, with larger employers able to spread administrative expenses more efficiently. Despite the variation in fees, most participants across plans have access to high-quality investments, with over 94% of defined-contribution assets allocated to Morningstar Medalist-rated options. 

The report highlights that even small plans can be cost-effective, with 20% of them coming in below the median cost for medium-sized plans. However, more than $600 billion has exited workplace retirement plans annually since 2020, often due to rollovers into IRAs when employees change jobs. 

Finsum: Investors should carefully weigh whether their workplace plan offers better value through low fees and strong investment options before making such moves.