Outside-IN

Outside-INblog

Outside voices and views for advisers

Private equity firms see hidden value in 401(k) record keeping

There appears to be money for "pure" record keepers that don't use asset management fees as a crutch

Sep 28, 2017 @ 10:27 am

By Fred Barstein

Sometimes when enough people say the same thing, it becomes the conventional wisdom. That doesn't necessarily make it true.

Most 401(k) industry experts claim there isn't money to be made in the record-keeping business. But some heady private equity firms backing providers like Ascensus Inc., Alight Solutions (the business Aon Hewitt recently sold to Blackstone Group), Newport Group, Aspire Financial Services and a few robo-advisers are betting against the conventional wisdom.

What do they see that most of the 401(k) industry is missing?

Bob Guillocheau and David Musto, respectively Ascensus' chief executive and president, with whom I spoke recently, believe private equity sees value in the 401(k) industry because it is still very fragmented. Record keepers are likely to go through another round of massive consolidation, which can bring greater profits and efficiencies.

Once established, record keeping does not require extensive capital, according to Mr. Guillocheau, and is driven mostly by people and technology, with the latter getting cheaper. There's a lot of money moving to and already in the retirement market, which is perhaps why robo-advisers are also attracting significant investments.

Further, it's getting harder and harder for record keepers that are also asset managers to push their proprietary investments, especially to larger retirement plans and through consultants or sophisticated plan advisers. Yet most of the largest 401(k) record keepers are part of insurance or mutual-fund businesses still relying on asset management fees to subsidize their service business.

That is likely why the conventional wisdom is true for firms that dominate the record-keeping market. The 401(k) record-keeper graveyard is filled with money managers who had no idea how to run a service business that needs to leverage technology and efficient business processing.

"PURE" RECORD KEEPERS

Mr. Guillocheau said Ascensus has built a business around what others consider a cost of doing business. The firm is a "pure" record keeper, meaning the company doesn't also have proprietary asset management. It focuses on small 401(k) plans and charges direct, not asset-based, fees.

The company has close to 50,000 401(k) plans and partners with well-known firms like Merrill Lynch, Morgan Stanley, Vanguard Group and LPL Financial, which each use Ascensus as an outsourced platform in some fashion. Ascensus also has a large 529 business, thanks in large part to its acquisition of UPromise Investments, and has been named by a few states such as Oregon and Illinois to be the record keeper for their auto-IRA programs.

Alight, Newport Group, Aspire and a few robo-advisers are similar, in that they are also "pure" record keepers.

Distribution is a weak spot for robo-advisers and the small pure record keepers. They cannot afford to hire armies of expensive wholesalers. Money managers and distributors that do have distribution see pure record keepers with no investment agenda as an efficient way to access small businesses and tens of millions of participants.

In the short term, private equity firms hope their record-keeping companies will be bought up as consolidation continues; long term, they might see gold in the participant data they control as well as access to participants on their system to sell other goods and services. Providers and advisers are just starting to realize the opportunity, over which more savvy tech firms and online marketers would salivate.

So, there appears to be money in 401(k) record keeping for disciplined, focused firms with access to capital, for which record keeping is a core competency and for those that do not use asset management fees as a crutch.

Plan advisers should be wary of providers that rely too much on asset management to subsidize record keeping. Chances are many of these providers will not survive the next consolidation wave, especially as money continues to move away from proprietary assets and to less profitable passive investments.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

Cutting through the red tape of adviser regulation is tricky

Don't expect a simple rollback of rules under the Trump administration in 2018 — instead, regulators are on pace to bolster financial adviser oversight.

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

State measures to prevent elder financial abuse gaining steam

A growing number of states are looking to pass rules preventing exploitation of seniors.

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print