A recent DCIIA/TRAU study among 18 defined contriubution record keeper senior executives registered to attend the 2025 TRAU RPA Record Keeper RoundTable and Think Tank concisely described the rapidly evolving complexity of competing in the industry. In the interviews, one simple question was asked: What keeps you up at night when you consider the opportunities and threats to the DC recordkeeping industry, and your firm, specifically? Collectively, the executives described a model of interrelated factors (often countervailing) they are trying (or need) to optimize to survive (or thrive) in this highly competitive marketplace: the Recordkeepers’ Efficient Frontier.
Challenges to Staying on “The Efficient Frontier”
So, what are the factors, positive and negative, at work that must be balanced to operate on the efficient frontier? Clearly, the forces of fee compression and volatile markets are driving the search for new revenue streams. Both are choking off or making unpredictable the precious resources needed to operate efficiently through innovation, expansion or acquisition. And less certainty surrounding the probability of litigation (e.g., Cornell Case) makes record keepers more cautious about innovating. Several reflected that, “We just can’t get any cheaper, so we need to be at scale and keep expenses minimal and efficient through technology and offshoring.”
Strategies to Stay on “The Efficient Frontier”
Record keepers are seeking (and often finding) new additional revenue by, to name a few, moving up (or in some cases moving down) market, expanding at the low end by improving access to and affordability of start-up plans, as well as mining the cross-sell opportunity within their commercial clients (as in the case of banking institutions). State mandates are proving to create opportunity as employers seek to avoid government involvement in their firms, and/or plans created by the mandates are converting to private sector plans. PEPs, some reported, are growing in popularity at the lower end of the market and moving up-market.
But survival strategies are not just expansionary. Record keepers are also taking defensive steps to operate efficiently. Focusing on high ROI businesses, eliminating channel conflicts where relationships can be stolen and banning customization in the micro end of the market were mentioned by several record keepers. Others mentioned that more consolidation is needed in an industry with 80 record keepers.
Convergence
Most executives realize the need to retain assets, which is partially driving the convergence of wealth management and recordkeeping. But engaging with wealth advisors has its own set of related complications.
Record keepers, dependent on advisors for distribution, are developing programs to assist them in understanding the DC market and maximizing opportunity. Data sharing is at the forefront as wealth advisors pressure record keepers for leads. Data sharing is obviously not a simple matter because operational and legal matters must be resolved. The industry is still trying to agree on who owns the data and what the liabilities are downstream once the data is shared. Some recordkeepers are implementing or investigating revenue-sharing agreements with wealth advisors.
“The Golden Rule”
Keeping the customer satisfied has obviously always been an effective way to retain and acquire DC plans. But with so much attention being placed on expanding books of DC business and finding new revenue streams by expanding into new areas, service quality deterioration must be considered. Plan sponsors are expecting increased service quality for all participants (regardless of balance size) via innovation in the areas of ease-of-use (through automaticity and simplification), financial wellness programs and emergency savings accounts. Competitive pressure from all record keepers is pushing the bar higher in these regard fronts.
“The Golden Rule” cited by record keepers is to expand the number of plans without increasing staff. That sounds good as an ideal concept, but it is riddled with challenges. Record keepers feel that technology is the path to adhering to the ideal. That is, they agreed that the latest technology is required to increase the productivity and effectiveness of the human element. Long-standing, larger DC plan sponsors are used to the human element. Furthermore, plan sponsors agree they measure satisfaction by how much or little time they need to spend managing their plan and keeping their participants happy. To wean them off people, the technology must be highly advanced. Artificial Intelligence, generally, and machine learning, specifically, arose in the interviews as the primary solution. However, they quickly pointed out that the cost of state-of-the-art technology is rising, and integrating new technology into legacy recordkeeping systems is far more difficult and costly than integration into start-up systems. Both these constraints combine to exert upward pressure on costs.
A third, and possibly most onerous, constraint is the availability of high-quality staff. Record keepers reported that availability is diminishing relative to demand by all industries in the U.S. and worldwide, not only DC recordkeeping. This market dynamic was created by the ability to work remotely (aided in part by COVID), forcing record keepers with a good supply of local, lower-cost labor to compete in national or even global markets at higher wages.
The Record Keepers’ Efficient Frontier Model
Staying on the Record Keepers’ Efficient Frontier Model requires as close as possible adherence to the “Golden Rule:” Expand the number of plans without increasing staff.”
To meet this lofty ideal, record keepers are rebalancing the technology-to-labor ratio, thereby seeking to optimize operational efficiency. But they must do this without compromising plan sponsor and participant satisfaction and outcomes. Rising labor, technology and vendor costs combined with fee compression, volatile markets and labor shortages are making operating on The Recordkeepers’ Efficient Frontier extremely challenging. According to many TRAU Roundtable record keepers, those who come closest to the Efficient Frontier by adhering to the Golden Rule will be the survivors.
To be continued at the next roundtable.
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