Principal-Wells Fargo retirement deal would be among largest ever

Acquisition would be in line with trend of record keepers seeking to gain scale to combat fee reduction.

There would be a new behemoth among record keepers of defined-contribution plans if Principal Financial Group were to follow through on a reported deal to acquire Wells Fargo & Co.’s retirement-plan unit.

The deal — which could fetch more than $1 billion, according to Reuters — would be among the industry’s largest ever, and more than double Principal’s retirement plan assets under administration.

Wells Fargo oversees $364 billion in retirement assets for institutions — $239 billion in DC-plan assets and the remainder in pension plans. Wells Fargo oversees nearly 3,500 defined-contribution plans with 3.4 million participants.

Principal, meanwhile, has $206 billion in retirement assets — $187 billion of which comes from approximately 38,000 defined-contribution plans. Its total number of participants is unclear.

The combined retirement unit would put the insurer in the game with TIAA, Vanguard Group, Empower Retirement and Alight Solutions, each of which has several hundred billion dollars in retirement assets under administration and are among the largest service providers to DC plans, behind front-runner Fidelity Investments.

“This could change the landscape quite a bit,” Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, said of the potential deal. “We’re talking about two of the top 10 record keepers.”

Principal is in “advanced talks” to buy Wells Fargo’s retirement business, according to a Reuters report published Sunday citing anonymous sources familiar with the matter. A deal could be announced later this month, the report said.

A Bloomberg report from November said Wells Fargo was considering a sale of its retirement-plan-services business. The firm has been offloading business lines recently amid an enterprise-wide review prompted by a string of consumer scandals.

Spokespeople for Principal and Wells Fargo declined to comment on the potential deal.

Consolidation of record-keeping businesses has been a fairly steady force in the retirement industry since its early days. A decade ago, there were approximately 400 to 450 record keepers, spanning big national players to smaller regional and local firms, according to data from consulting firm Sterling Resources Inc. That number today is around 160.

The deals in recent years have gotten larger, though, as firms seek to gain scale to combat a continued reduction in fees.

“Certainly, it would be consistent with the general feeling that you need large scale to be efficient and therefore profitable in the retirement industry, especially with fee compression,” said Peter Demmer, CEO of Sterling Resources, of a potential Principal-Wells Fargo deal.

Great-West Financial’s purchase of J.P. Morgan Retirement Plan Services in 2014 was the largest deal of the past few years, adding $167 billion and 1.9 million participants to Great-West’s retirement unit (which has since been rebranded to Empower). Prior to that, ING’s acquisition of CitiStreet in 2008, and its $262 billion in assets under administration, represented another blockbuster deal.

“I continue to be one of those advisers who finds this worrisome,” Ms. Lander said of the consolidation trend. “You have the record-keeping landscape dominated by a handful of major players.”

Other insurers have closed on smaller but notable deals within the past few years, such as John Hancock, which bought New York Life’s business in 2015, and Transamerica, which bought Mercer’s that same year.

If Wells Fargo ultimately exits the market, Bank of America Merrill Lynch would be the only remaining bank with a large record-keeping business.