Private equity adds fuel to 401(k) record-keeper consolidation

Private-equity firms have snapped up a bunch of record keepers, perhaps motivated by access to millions of participants to whom they can sell a variety of financial product

Just as 401(k) record keepers cry poverty, claiming there are no profit margins left and fueling consolidation, private equity has jumped in, perhaps seeing value that traditional record keepers are missing.

What’s causing this consolidation and what does private equity see that the rest of the industry doesn’t?

Just like with the airline industry five years ago, 401(k) record keepers have been selling fast, though there have been fewer deals recently. There were more than 100 national record keepers over a decade ago, but money managers with little or no relevant skill sets dropped out to focus on asset management, selling their funds on other providers’ platforms.

Market saturation and the high cost of technology and distribution have led to excess capacity and falling prices, and savvy advisers have used cost-cutting as an effective prospecting tool. The result: The ranks of national 401(k) record keepers have dwindled to roughly 40, not counting regional record-keeping third-party administrators.

The market heated up in 2014 with seven 401(k) record-keeper deals, punctuated by Empower Retirement, which brought together the DC businesses of Great-West Financial, Putnam Investments and JPMorgan Chase & Co. There were six deals in 2015, led by John Hancock Financial’s acquisition of New York Life’s 401(k) business, Ascensus Inc.’s purchase by a private-equity firm and OneAmerica Financial Partners’ acquisition of BMO Retirement Services. Recent deals in 2017 include Blackstone Group’s purchase of Aon Hewitt’s record-keeping unit and Xerox Corp. spinning off its record-keeping division.

Ultimately, based on demand and the number of viable record keepers, I estimate there will only be nine record keepers remaining that serve the adviser-sold 401(k) market, which now covers plans with $1 million-$250 million in assets. That group does not include the mega-market or micro-market providers (think payroll companies), or the two big banks with large broker-dealers who also have record-keeping units (Wells Fargo & Co. and Bank of America Merrill Lynch).

By my count, there are currently around 25 providers vying for the nine spots covering the adviser-sold market. You do the math.

Survivors will be able to service specialist and non-specialist retirement plan advisers with different products and sales forces and will also have multiple product lines covering not-for-profit, educational institutions, government and union plans to leverage 401(k) infrastructure.

Essentially, the business of the niche providers is more valuable and profitable to those who would rather buy than wait for slow organic growth or to keep competitors from getting an edge.

So what does private equity see in 401(k) record keepers? Private-equity firms buy undervalued properties that they can build up to sell. The deals they’ve been making are not for providers in the very competitive adviser-sold 401(k) market. Aon Hewitt services mega plans where the competition is thin. Ascensus Inc. is an outsourcer, white-labeling its services to providers like Vanguard Group (which partners with Ascensus to record-keep small-market plans), and also works with micro-market plans. Aspire Financial Services, purchased by a venture-capital firm, is a micro-market technology play. And Newport Group, backed by a private-equity firm, is the leader in non-qualified retirement plans, while having amassed an interesting 401(k) business including the providers Verisight and DailyAccess.

Beyond niche markets, private-equity firms may see the real value of 401(k) record keepers in the 80 million participants in these plans, most of whom are not covered by traditional wealth managers or financial planners. Aggregated in one place with lots of proprietary data, can these record keepers sell 401(k) participants not just other investments or capture rollovers into individual retirement accounts, but also sell them car insurance, mortgages or credit cards? Robo-advice may be another engine for opportunity, with access to millennials, now the largest percentage of the work force, and retiring baby boomers being attractive.

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.