Potential Pru Retirement sale a cautionary tale of a 401(k) innovator

It is no wonder, but certainly disappointing, that one of the industry’s most innovative providers, Prudential Retirement, is reportedly exploring a sale. That highlights how much record keeping has become a commodity focused on scale and costs.

At an industry event a few years ago, a $600 million plan sponsor said that anyone approaching him or his committee with radical innovations would immediately be escorted to the exit.

As investment professionals, we are trained to weigh the risk against the benefit. There’s little benefit for plan sponsors to radically innovate but lots of risk. What’s the upside for providers?

It’s no wonder, but certainly disappointing, that one of the industry’s most innovative providers, Prudential Retirement, is reportedly exploring a sale. That highlights how much record keeping has become a commodity focused on scale and costs.

Will innovative retirement plan advisers suffer the same fate? Are RPA “triple F” services (fees, funds and fiduciary) a commodity enabling larger groups to price out competition?

Prudential has led the industry in many ways — on financial wellness, retirement income, emergency savings and pension-risk transfer — all very innovative and needed. The company offered participant advice and eschewed the small 401(k) market dominated by nonspecialist advisers to focus a more limited sales force on the experienced and elite RPAs. And its consumer ads appealed to the realities of retirement planning, using Harvard psychology professor Dan Gilbert.

What went wrong?

Record keeping has become a scale business that requires those focused on the adviser-sold market to to offer solutions for all plan sizes, not just mid-market plans. Prudential avoided most of the “blind squirrel” advisers, but it might have sacrificed opportunities and relationships with RPAs, many of whom dealt with smaller plans. Even Vanguard realized it needed an integrated small-market solution when it hired Ascensus over a patchwork of regional third-party administrators.

No one, including Prudential, has figured out how to monetize financial wellness. Though advice is important, it might have put Prudential into competition with RPAs. Retirement income has yet to take off, even though the need is significant, because of transferability issues and the poor reputation of annuities among fee-based advisers and plan sponsors. Emergency savings are needed but unfortunately not lucrative.

The third of four phases of the consolidation curve discussed in a Harvard Business Review article is characterized by mega-deals (see the sales of the MassMutual and Wells Fargo retirement divisions) by providers with above-market organic growth rates that ruthlessly attack vulnerable competitors. Prudential has been on the wrong side of this equation for a while, although it’s been rumored to have been among potential buyers on a number of deals. Prudential CEO Charles Lowrey noted that the company was looking to get out of interest-rate dependent businesses, which couldn’t have been helped by low rates and the pandemic.

If it in fact does sell, the demise of Prudential Retirement could have been easily predicted. With just five to seven providers likely to make it into the fourth phase of the consolidation curve, the real question RPAs need to ask is “Who’s next?” or maybe “Who’s not next?”

Private equity is valuing record keepers and RPA firms based in part on the promise of monetizing participants. Even if record keepers fail, the larger ones will do fine, just based on scale and predatory pricing.

But what about RPA firms? Are financial wellness and cross-selling other financial services to participants a pipe dream? Will RPA services be viewed as a commodity by plan sponsors, most of which see little to no upside in being an innovator and do not view retirement plans strategically?

It’s hard to imagine that plan sponsors will dramatically change, even as they slowly wake up to the importance of their retirement plan and the power of the worksite financial platform to help their employees. And the potential sale by Prudential of its retirement division is not a good sign.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.