The price for 401(k) administration services has declined at an estimated annualized rate of 1.5% in the three years to 2017, aiding buyer power. While input costs and demand drivers affect service prices, the price trend can be better attributed to the introduction of regulation forcing companies to disclose fees more clearly, which has then driven down service prices. Also, the rise in the number of lawsuits that employees have brought against employers because of levying unfair fees for 401(k) plans and mismanagement of employees’ retirement funds has translated into a price decline, as employers have renegotiated contracts with providers for cheaper services. Additionally, buyers have increasingly opted to purchase cheaper services that track indexes rather than more expensive services that involve active management of funds.
Because of these developments, increasing demand for services has served to temper price declines rather than cultivate price growth. Demand for services has increased in concert with economic growth during the past three years. In particular, the number of employees has boosted demand for 401(k) administration services because employers have required a higher breadth of services to manage a larger number of employers. Continued growth in the number of adults aged 65 and older also has sparked demand for 401(k) administration services by suggesting a future need for 401(k) plans, which has given current employees an incentive to request such plans from employers. Finally, improvements in the S&P 500 have bolstered demand for 401(k) administration services by boosting the appeal of investment platforms such as 401(k) plans. By cultivating demand for 401(k) services, these drivers have limited the extent to which prices have fallen.
The price for 401(k) administration services has exhibited a low level of volatility in the three years to 2017, indicating that rates for services have not fluctuated considerably on an annual basis. As a result, buyers have been able to more accurately budget for 401(k) administration services, further helping buyer power. Additionally, in light of future price reduction, buyers may benefit from holding off on purchasing services if possible.
During the three years to 2020, the price for 401(k) administration services is forecast to continue falling at an average annual rate of 2.3%, enhancing buyer power. During the period, increased regulation regarding fair pricing, more lawsuits brought against employers over 401(k) plans, and a greater emphasis on passively managed funds are expected to underscore the continuing fall in price. However, further increases in demand for services as the economy continues to expand will mitigate the extent to which suppliers will lower prices.
Through 2020, demand will continue to escalate, further discouraging suppliers from slashing rates for services. First, the number of employees is expected to continue rising as the economy continues to strengthen. With more employees under their responsibility, employers will have a greater incentive to procure 401(k) administration services. In addition, the number of adults aged 65 and older will increase, reinforcing the belief that present-day employees need to plan for their future retirement as advances in medical technology extend average life expectancy. Employees will therefore be more insistent that their employers acquire 401(k) administration services on their behalf. Finally, the S&P 500 will continue to grow, making 401(k) plans and accompanying 401(k) administration services more attractive. Collectively, these factors will heighten demand for 401(k) administration services. Growing demand for services will continue to moderate the magnitude of the decline in the price for 401(k) administration services.
However, the price for 401(k) administration services will continue to exhibit a low degree of volatility. By stabilizing yearly price changes, low price volatility will ease buyers’ budget planning processes for 401(k) administration services. As a result, buyers will be able to procure their services when needed rather than timing their purchase based on expected fluctuations in rates for services.