As the retirement landscape evolves, major players in the industry are introducing new retirement income solutions. This shift is driven by decreasing investment fees and the increasing number of Americans who don’t have access to guaranteed income options. Consequently, asset managers are seeking alternative income streams and offering more cost-effective solutions.
A recent InvestmentNews article spotlighted these recent trends. John Faustino, who leads retirement products at Broadridge Financial Solutions, noted that product providers have been dealing with fee compression for years. He explained that the recent push to launch new retirement income solutions is a response to the growing need for decumulation options for plan participants. These new offerings typically provide lower-cost annuity benefits within retirement plans, which are more affordable than those available outside the plans. This also gives retirement plan providers an additional income source.
Fee compression creates opportunities for providers to stand out and expand their distribution, increasing their margins. Mr. Faustino pointed out that insurance products within 401(k) plans tend to have lower fees compared to individually sold products, offering firms a chance to compensate through broader distribution.
This trend is boosting interest in insurance-based retirement income solutions, such as annuities, which offer guaranteed income for retirees. These products help providers differentiate themselves and mitigate the impacts of fee compression.
Jim Wessels, a partner and financial advisor at Vision Financial, observed that fee compression has made the retirement market more competitive, especially in the 401(k) sector. He attributed this trend to advancements in technology and recordkeeper consolidation, which have enabled providers to offer more services at lower costs.
Mr. Wessels also mentioned that the industry hasn’t always focused on fee compression. However, advisors now provide significantly more services than they did two decades ago, justifying the fees they charge. Clients today expect comprehensive financial plans that include estate and tax planning, along with risk management.
Chuck Failla, CEO of Sovereign Financial, emphasized the need for advisors to deliver value to justify higher fees. One way to enhance their value proposition is by offering pooled employer plans (PEPs), which simplify and reduce the cost of 401(k) plans for companies, he noted. PEPs lower administrative costs, allowing firms to manage more business efficiently.
Mr. Faustino warned that as these solutions become more common within 401(k) plans, the associated fees will likely become more competitive. This highlights the importance for advisors to conduct thorough research to find the best options for their clients. Mr. Faustino said he believes that default investment options within retirement plans will be the most successful, as individual participants often do not engage as actively as hoped, even with education and guidance.