Retirement Income Focus of DC Growth

With the retirement services industry’s growing focus on providing workers with a retirement income stream, the defined contribution market will continue morphing into a platform for products and services supporting that industry concentration.

That was a key conclusion of a new McKinsey & Company study on the DC market’s future based on the consultant’s interviews with 50 experts and its own modeling and analysis, a release said. The study asserted that by 2015, the transformed DC market will provide a variety of asset accumulation products, a wide range of personalized advice models, transition planning from work to retirement, and retiree lifetime income solutions.

The focus will be on providing income solutions to ensure that retirees have enough money to sustain them throughout retirement, even well into their 80s and 90s. In fact, developing appropriate products to turn retiree assets into reliable streams of income during retirement will be the next battleground in the DC market, the consultant firm said.

According to the McKinsey researchers, in the DC market of the future, participants will increasingly favor investments in asset allocation funds (particularly target-date funds) with embedded advice, and demand for passive advice is likely to double. “Industry economics for DC players will become even more diversified and driven by lifetime relationships with participants,” the researchers commented.

Defined contribution will grow rapidly to become one of the largest financial retirement markets, accounting for a third of the average household’s net worth, McKinsey said. The DC market is likely to double in size by 2015 to between $7.5 trillion and $8.5 trillion in assets under management. Higher DC participation and increased contributions will more than offset withdrawals of over $3 trillion by retiring Baby Boomers.

“Beyond the business implications of the transformation in the DC market, the public policy stakes are enormously high,” McKinsey said in the release. “If the DC industry adapts well, it will play a critical role in helping to secure a more comfortable retirement for millions of Americans in the future.”

The competitive landscape of tomorrow will feature a four-way race between large integrated providers, large innovative insurers, well-performing investment-only asset managers and new entrants, including institutional asset managers and some pension consultants, according to the report.