Is massive consolidation in the 401(k) record-keeping industry inevitable?

Conventional wisdom says yes, industry leaders say not so fast

Nov 9, 2019 @ 6:00 am

By Fred Barstein

The conventional wisdom is that the 401(k) record-keeping industry is going to go through massive consolidation due to increased costs and reduced margins. But at the 2019 Retirement Plan Adviser Record Keeper Roundtable and Thinktank, senior leaders of the major providers who gathered did not agree.

[More:401(k) advisers are battling on multiple fronts]

So what's driving consolidation? And why the conventional wisdom that a handful of mega providers will enjoy an 80% market share may not be inevitable?

Margin pressure was top of mind for providers. Patrick Murphy, CEO of John Hancock Retirement Services, said it is difficult and costly to deliver basic participant services while having to make tough decisions on where to invest in new technology. Sandra McCarthy, president of retirement services at OneAmerica Financial, noted that the industry is sometimes forced to build the next shiny object that may not result in retirement readiness.

There are more than 40 national record keepers along with more than 500 regional providers. Most of the nationals have to support large and expensive sales forces, while paying to be on platforms of broker-dealers and the growing number of DC aggregators. Retirement plan advisers depend on providers to support their sales and marketing efforts.

[More: The 10 biggest threats for retirement plan advisers]

Technology costs can reach more than $100 million annually just for maintenance for larger platforms, and upgrades and major revisions add more expense.

Acquisitions were discussed, as Jerry Patterson and Joni Tibbetts from Principal Financial reviewed their firm's decision-making process to buy Wells Fargo's retirement division. Not only does Wells give Principal a boost in the mid-size and larger 401(k) markets, they doubled their participant count affording greater clout and revenue.

Aspire CEO Mark Klein echoed those sentiments about why he and his partners at PCS decided to acquire Aspire. Though not a record keeper, Future Plan of Ascensus is growing by leaps and bounds buying up compliance third-party administrators. And John Moody from EdgeCo is acquiring smaller providers starting with First Mercantile and American Trust.

So why won't 401(k) record keepers follow the airline industry and consolidate into just a few national vendors fueled by acquisitions?

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Financial services companies that have a 401(k) record-keeping division that's not likely to be a top-tier provider may be tempted to sell, like Marsh and McLennan did when it divested Mercer's record-keeping division to Transamerica. But complimentary strategic initiatives may delay consolidation for the foreseeable future including:

Convergence of retirement and wealth management

American Funds and T. Rowe Price both enjoy healthy retirement businesses that are more known for their money management prowess than their administrative or record keeping expertise. Brendan Mahoney, American Funds' Head of Insurance and Intermediary Sold Retirement Plan Sales, said his firm focuses on "wealth management specialists" who do some retirement plan business. T. Rowe Price is a top target date fund provider and DCIO, which fuels its retirement business.

Convergence of benefits and retirement

Both Transamerica and MassMutual have gone through major internal reorganizations to be able to cross sell other services, including voluntary benefits and deferred compensation plans which have high margins.

Insurance providers' general accounts

Insurance providers' record-keeping businesses are buttressed by their leverage of general accounts that supply in-demand capital preservation products like stable value and annuities. Giving up retirement plans could result in big hits to their bottom lines.

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Participant services

Prudential has made big bets on financial wellness and retirement income. Phil Waldeck, President of Prudential Retirement, said "While financial wellness is unclear, financial illness ... is very clear, in terms of the problems in America." There's a need and opportunity to help workers handle more than just retirement issues at work while 80 million baby boomers will be retiring in the next 20 years many looking for distribution assistance.

New technology

Clunky old record-keeping systems are expensive to maintain and change. New technology being created by fintechs like Vestwell and Guideline may afford providers opportunities to offload smaller plans without losing the relationships, as they might be able to leverage pieces of the new technology like integration of payroll. Though we are just at the precipice, blockchain may be able to not only protect participants' privacy but provide opportunities to sell other services.

News laws

Multiple employer plans may lead to lower distribution and administrative costs while the SECURE Act could boost auto-plan features making current plans more profitable.

[More:Reducing the number of 401(k) record keeper partners poses a challenge for plan advisers]

Special circumstances

Bank of America, unlike J.P. Morgan or Wells Fargo, may see value as well as competitive advantages in serving bank clients and their captive Merrill distribution. Ascensus can survive on servicing Vanguard's smaller market sales while enjoying a diverse base of revenue which is growing thanks to Future Plan.

CUNA, a mutual company, is unlikely to abandon their credit union partners where they enjoy a +50% market share of partners' 401(k) plans. OneAmerica is under less pressure as a mutual company and may see opportunities to sell in-plan annuities as well as participate in the looming retirement income market. Payroll providers will likely never exit.

The retirement market is attractive to money managers because the assets are sticky, 401(k) plans are as well. Plan sponsors are reluctant to make changes. Elite plan advisers have been trying to consolidate their roster of 20+ providers with little success. Larger providers best positioned to buy competitors may believe that resources are better spent on growing organically.

So while business logic would lead the rational man to conclude that massive 401(k) record-keeping industry is inevitable, that scenario may take a really long time, though it could be accelerated by a market downturn.

Fred Barstein is 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.

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