1. Demographic shifts: “Demographic shifts are now putting pressure on the retirement industry’s growth potential and profitability,” according to the report. About 11,200 Americans turn 65 every day, as the DC system is entering a decumulation phase. Baby boomers retiring and withdrawals are outpacing contributions, with this trend expected to accelerate until 2030. The number of Americans turning 65 will peak in 2026-2027, intensifying the pressure on retirement solutions providers. 

2. Profitability squeeze: “Retirement solutions providers are earning less in administration fees from DC plans and are increasingly relying on revenue from ancillary products and services to maintain profitability,” according to McKinsey. Recordkeeping fees have declined by 25-35% over the past decade due to competition, regulatory changes, and cross-subsidized business models. Rising costs, driven by inflation and regulatory requirements, have further compressed margins. 

3. Shift to retail wealth management: “Assets flow into retail wealth management accounts in two main ways: crossovers, where retirement plan participants open another account with their recordkeeper to manage out-of-plan assets, and rollovers,” according to the report. Rollovers into individual retirement accounts (IRAs) and crossovers into retail accounts are key drivers of this growth. 

4. Consolidation of retirement accounts: “The top 10 DC recordkeepers now control 78% of total industry assets, up from 56% in 2013,” according to McKinsey. This reflects ongoing consolidation and private equity interest. 

Recommendations for retirement recordkeepers

Here are some recommendations for retirement solutions providers, according to McKinsey:
 
1. Optimize core recordkeeping business: “Given the evolving industry dynamics, it is imperative for retirement solutions providers to optimize their core recordkeeping business and move into adjacent revenue streams to remain competitive and grow profitably,” according to McKinsey.
For small business plans, this might include simplifying the IRA rollover process to improve participant satisfaction and retention by offering personalized consultations and financial planning services, or leveraging AI and automation to enhance plan participant experience and reduce costs. 

2. Generate additional revenue streams: Retirement recordkeepers’ revenues from administration fees have been declining as they have substantially reduced these fees to win new business..Develop in-plan retirement income solutions, such as annuities and decumulation tools. Build omnichannel financial advisory services tailored to participant preferences. Use sophisticated marketing to strengthen brand awareness and participant engagement. 
 
3. Transform cost structures: “Retirement solutions providers’ average costs per participant decreased 1% a year between 2013 and 2023; however, costs related to technology and support functions such as finance, HR, and legal have increased largely due to inflation,” according to the report. Employers and 401(k) recordkeepers need to imagine workflows using generative AI and machine learning to improve productivity, McKinsey recommends. 

Related: 12 tech trends shaping the future of 401(k)s: New solutions to help close the retirement savings gap

The most successful players in the US retirement industry, with $36 trillion in assets as of 2024, will be those that adapt to shifting dynamics, innovate in participant-centric solutions, and capture new profit pools to determine the financial futures of millions of Americans, according to McKinsey.