Introduction
The US retirement services industry is at a pivotal crossroads. Despite a decade-long decline in the total cost per participant for retirement recordkeeping, the industry faces a new challenge: specific cost pockets – particularly support functions (like finance, HR, legal), and technology support – are rising, with support function costs alone increasing by 5% annually. This trend is driven by inflation and heightened regulatory demands. In this scenario, simply maintaining the status quo is no longer an option. To remain competitive, retirement providers must adopt innovative strategies that streamline operations and maximize efficiency across every aspect of their business. This blog explores key challenges facing the industry and highlights actionable solutions, including digitization, offshoring, and outsourcing, that leading firms are using to optimize select cost pockets and secure their position in a crowded market.
According to McKinsey, some cost items have become a defining challenge for the US retirement industry. While average costs per participant have decreased by 1% annually over the past decade, thanks to economies of scale and a focus on productivity, expenses in critical areas like technology (including in-house and outsourced technology spend) and support functions (including finance, HR, and legal) have climbed upward.
The retirement recordkeepers' total costs per participant have fallen, despite rising costs for support functions and technology.
This shift has forced retirement solutions provider to rethink their spending and restructure expenditures to maintain profitability. Additionally, other indirect costs such as facility-related expenditures (including staffing), have also increased. In this climate, careful cost management is more crucial than ever, not only to protect profit margins but also to free up resources for investments in growth and innovation that will shape the future of retirement services. Providers are now under increasing pressure to uncover new efficiencies through digitization (such as cloud adoption and AI), as well as offshoring and outsourcing. Recordkeepers (RKs) can adopt the following strategies to streamline their cost units and gain more efficiencies.
Strategies
Digitization
- Cloud migration
- AI adoption
Offshoring
- Captive Centers
- Back Office Support
Outsourcing
- Independent IT Vendors
- Recordkeeping Administration
Digitization
The US defined contribution market is largely characterized by legacy and mainframe-based recordkeeping systems that were built in-house. As this outdated technology cannot meet evolving customer and regulatory demands, it negatively impacts participants’ and plan sponsors’ experiences. Retirement providers can consider the following technological strategies to reduce costs:
1. Cloud Migration
Recordkeepers can migrate majority of their IT applications to public cloud, which typically offers lower costs than private cloud solutions. Additionally, adopting a multi-cloud strategy can help minimize reliance on a single vendor. The examples below highlight firms that have successfully implemented these approaches:
- By 2025, Vanguard targets nearly 90% of its applications running on the public cloud, up from about 60% in 2022.
- Impact: Firm reported a 30% decrease in the cost of compute for applications that have moved to the public cloud in 2022.
- In Aug’24, Alight completed its cloud migration program from data centers, adding to its sustained efforts to improve its margins and simplify its business. The company has fully decommissioned its Lincolnshire data center and shifted to the AWS ecosystem.
- Impact: This transformation is expected to reduce the number of servers by 40%, middleware systems by 60%, and software used by 95%. These factors, along with Alight Work life’s shift to AWS, will aid Alight in saving almost $75M annually. The new system will also increase the efficiency and automation of the company’s solutions.
2. AI Adoption
Recordkeepers like TIAA and 401Go are utilizing AI technologies for streamlining client servicing by enabling more personalized communications, automating responses to participant inquiries, and simplifying complex plan information for easier understanding. Below are the successful use cases of recordkeepers who benefited from AI adoption:
Launched a proprietary generative AI technology platform (TIAA gAItSM) in 2024. It utilizes generative AI technologies and large language models from various sources to deliver next-generation capabilities. Mentioned below are the key use cases and features:
- Enhanced Client Service: Help associates provide quicker and more insightful answers
- Advanced Search Experience: Clients benefit from effective search function on TIAA's website
- Support for Asset Management: Breaks down complicated topics into simpler terms
In Sep’24, the company announced a partnership with Pontera to provide participants with personalized 401k account management from their financial adviser of choice. This initiative leverages AI to extract and manage plan data. Mentioned below are the key use cases and features:
- Digital Experience: The company's leadership has highlighted the role of AI in moving away from paper-based administration and enabling digital, participant-focused solutions
- Personalized Experience: Allowing for more personalized investment advice and efficient portfolio management
Offshoring
Adopting offshoring strategies has enabled recordkeepers to significantly lower their operational costs by accessing skilled talent in lower-cost regions and streamlining back-office functions. By shifting processes, such as technology development, data management, and customer support overseas, recordkeepers can achieve economies of scale and maintain service quality while reducing expenses tied to hiring and retaining domestic staff. Below are successful examples of recordkeepers who have benefited from implementing offshoring strategies:
The firm is opening its largest tech development captive center outside the US in Hyderabad, India, by the end of 2025.
- Rationale: This Global Capability Center (GCC) will focus on artificial intelligence / machine learning, data and analytics, mobile engineering, cloud engineering, and cybersecurity. It plans to hire 2,500 employees in four years in India. GCC is a strategic move to build internal capabilities and accelerate digital transformation, cloud adoption, and AI innovation for Vanguard clients worldwide.
The company acquired full ownership of its Indian joint venture in 2023, establishing a wholly owned subsidiary branded as Voya India (captive center). This move marked the transition from a joint venture partnership (originally set up in 2019) to a fully insourced operation under the Voya India name.
- Rationale: The acquisition of the remaining stake allowed Voya to directly control and expand its Indian operations, enabling 24/7 operations processing, greater automation, faster speed to market, and enhanced performance, agility, efficiency, and innovation for its global business.
Outsourcing
Outsourcing has enabled recordkeepers to significantly reduce costs by eliminating the need for in-house staffing, benefits, and infrastructure expenses, allowing them to pay only for the services required. By leveraging specialized external providers, recordkeepers gain access to expert talent and advanced technology, which improves efficiency and accuracy while further lowering operational expenses. Highlighted below are select use cases of recordkeepers who have embraced outsourcing strategies:
In Aug’24, TIAA signed a multi-year deal with Accenture to support its recordkeeping operations.
- Scope: Accenture will support specific back-end recordkeeping operations of TIAA, focusing on technology modernization, digital experiences, and process improvements. TIAA will retain control over retirement plans, plan data, and all client relationships.
- Employee Transition: Approximately 1,500 TIAA employees, split between the US and India, will be offered positions at Accenture, with many expected to continue in similar roles but utilizing Accenture’s automated tools and processes.
- Rationale: TIAA cited the need to accelerate modernization, leverage artificial intelligence, and meet increasing client demands for enhanced digital services as primary drivers for the partnership.
In 2024, Infosys broadened its collaboration with Vanguard to emphasize greater optimization, efficiency, and scalability in its operations. This expansion builds on their original multi-year, $1.5B outsourcing agreement signed in 2020, under which Infosys took over day-to-day operations of Vanguard’s defined contribution recordkeeping business, including technology platforms and administration.
- Scope: The expanded engagement includes further transformation of Vanguard’s technology infrastructure, including cloud migration and data center modernization.
- Employee Transition: Infosys is reportedly preparing for a build-operate-transfer model, which could involve helping Vanguard to set up its GCC in India, leveraging India’s large tech talent pool.
- Rationale: The expansion is expected to create more mission-critical jobs in the US and India, and further enhance Vanguard’s recordkeeping technology and customer experience.
Conclusion
As the retirement industry navigates mounting competition with rising specific cost pockets, optimizing the cost structure is not just a matter of efficiency – it is essential for long-term sustainability and growth. The most successful retirement providers are embracing a multi-pronged approach: digitizing legacy systems through cloud migration and AI adoption, leveraging global talent via offshoring, and strategically outsourcing non-core operations. Real-world examples from industry leaders, such as Vanguard, Alight, Voya, and TIAA, demonstrate that these strategies can deliver substantial cost savings, operational agility, and improved participant experiences.
Ultimately, the path to cost optimization requires continuous innovation, a willingness to rethink traditional operating models, and a sharp focus on leveraging technology and partnerships. By doing so, retirement providers can not only withstand industry pressures but also position themselves as leaders in delivering value to plan sponsors and participants in the years ahead.
How can Evalueserve help?
Evalueserve provides comprehensive market and competitive intelligence solutions to retirement firms, focused on the workplace retirement market, helping them to gain timely access to relevant and actionable insights. Such firms can stay updated with the latest industry trends, regulations, market opportunities, and competitor insights. This would help them to take strategic business decisions such as new investments, potential M&As to enter new markets, expand the existing suite of product offerings, and others.
Here's how Evalueserve can assist clients in these areas:
- Industry Research: Evalueserve provides deep industry insights covering the latest trends, evolving regulatory and investment frameworks, market sizing, and potential industry opportunities.
- Competitor Strategy: Our competitive insights help develop highly focused competitive strategies to counter imminent threats. We also offer strategic business insights, competitor marketing positioning (participant engagement analysis), and earnings coverage of peers to understand management viewpoints and their strategic plans.
- Product Intelligence: Evalueserve conducts product benchmarking, provides insights that enhance the value proposition of any existing suite of offerings, and helps in launching innovative products to stay ahead in the marketplace.
