Nearly 20 years ago, the Pension Protection Act of 2006 offered our industry the potential for true step-change improvements in retirement security. Across stakeholder groups, we aligned to take advantage, as we saw the mass adoption of “auto” features, target-date funds and managed accounts. Today, opportunity knocks once again for transformational improvement. The defined contribution landscape is undergoing seismic shifts that are set to redefine the future and create better experiences and outcomes. First, after years in the making, we finally seem to have reached a tipping point for retirement income. Second, the surge in small employer plans, fueled by new state mandates, tax credits and scalable technology platforms, is democratizing access to DC plans like never before. Lastly, the convergence of retirement and wealth management is helping to deliver enhanced client service and innovation.
Retirement income has finally reached a tipping point
In my three decades in the retirement industry, I learned that driving real change in the DC industry requires alignment from all key stakeholder groups simultaneously: government and regulators, plan sponsors, record keepers, solution providers and — most importantly — participants. Finally, decades after the first DC retirement income solutions were introduced, we now have that alignment. With a safe harbor for in-plan annuities, demonstrated commitment from sponsors to offer help with retirement income, a proliferation of solutions from asset managers and insurers and — critically — real demand from participants, we’ve finally reached a tipping point.
Seventy-seven percent of respondents in J.P. Morgan Asset Management’s 2024 Defined Contribution Plan Participant survey are concerned about creating a steady stream of income in retirement that will last throughout their lives.
Meanwhile, 59% of respondents in J.P. Morgan Asset Management’s 2023 Defined Contribution Plan Sponsor survey believe retirement income is at least a part of a plan’s purpose.
The DC industry is responding to the increasing demand for retirement income solutions with innovative approaches that replicate the pension income of past generations. However, education alone is unlikely to solve the retirement income challenge for most participants. Therefore, it’s crucial for employers to understand not only what’s available but also how each approach aligns with employees’ behaviors, wants and needs. At J.P. Morgan, we use a highly data-driven approach to understand those wants and needs, leveraging anonymized spending data from over 60 million U.S. households to drive our retirement income insights.
As the market takes shape, we see solutions falling into three broad categories:
- Market-based solutions utilize investments in stocks and/or bonds to support income in retirement. These solutions are typically offered as a standalone investment option or integrated within the tail-end of a target-date fund.
- Annuity products, on the other hand, provide certainty in the amount of income purchasers will receive each year. These include immediate annuities, which seek to provide regular income payments immediately upon purchase, and deferred annuities, which seek to provide regular income payments that begin at an agreed upon date in the future.
- Hybrid solutions seek to deliver the combined benefits of both market-based strategies and annuity products. Innovations are already under way that integrate annuity-based lifetime income into the familiar target-date fund structure.
The small employer plan market is exploding
The democratization of retirement plan access is another pivotal trend. Historically, small businesses have faced significant barriers to offering retirement plans, including high costs and administrative complexities. However, recent state mandates, attractive tax credits from SECURE and SECURE 2.0 and technological advancements are catalyzing a surge in small employer plans.
Several states have enacted legislation requiring employers to offer retirement savings plans to their employees. These mandates are driving a wave of new retirement plan adoptions among small businesses, which previously may not have offered such benefits. As a result, more employees are gaining access to retirement savings opportunities, helping to bridge the retirement savings gap. The government is offering the carrot as well as the stick: SECURE 2.0 enhanced the small-employer tax credit up to an annual cap of $5,000 per year for employers with up to 50 employees.
In addition, the rise of technology-driven, scalable platforms is making it easier and more cost effective for small employers to implement and manage retirement plans. These platforms make high-quality investments available with institutional pricing, streamline plan administration, reduce costs and offer user-friendly interfaces for both employers and employees. With approximately 40,000 new small employer plans launching each year, financial advisers have a significant opportunity to engage with this growing market segment. Earlier this year, Cerulli Associates forecasted the industry will reach one million 401(k) plans by the end of the decade, propelled by this small plan growth, compared to roughly 700,000 today.
Beyond the rollover: the convergence of retirement and wealth management
The lines between retirement planning and wealth management are increasingly converging in a way that is reshaping the industry and addressing a need for holistic financial planning and the desire for greater levels of client service. In particular, at an unprecedented pace, adviser firms are acquiring financial adviser practices that bring together DC and individual financial planning capabilities under one roof. For example, the RIA industry is on pace to exceed 332 total transactions for the full year (an increase of 3.4% relative to 2023).
Traditionally, the transition from retirement planning to wealth management occurred at the point of an IRA rollover. However, the convergence of these two worlds is happening much earlier in the client relationship. Financial advisers are now integrating retirement planning into broader wealth management strategies, offering comprehensive financial help that encompasses retirement savings, investment management, tax planning and estate planning.
The convergence of retirement and wealth management is also driving innovation in service delivery, with firms offering enhanced digital tools, personalized support and seamless integration between retirement and wealth management services. Powered by scalable technology and, eventually, artificial intelligence, institutional-quality, holistic financial help will become increasingly accessible to the masses.
As we did nearly 20 years ago, when the Pension Protection Act ushered in a wave of meaningful innovations in plan design, participant engagement and product innovation, it is time once again to come together as an industry to dramatically accelerate meaningful improvements in U.S. workers’ retirement security. Breakthroughs in retirement income, the explosion of small employer plans and the convergence of retirement and wealth management are key trends that can drive this transformation — if we embrace them. As these trends continue to unfold, plan sponsors, record keepers, intermediaries, asset managers and other solution providers must evolve with the changing landscape, leveraging technology and personalized strategies to deliver exceptional client service. By doing so, they can help more individuals achieve financial security and peace of mind in retirement. Innovation for the benefit of the U.S. workforce is the call to action that unites us all.
Steve Rubino is head of retirement at J.P. Morgan Asset Management. He is based in Boston. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
