Recordkeeper Consolidation Creates a Smaller Pool of Plan Sponsor Choices

The announcement of Principal’s acquisition of Wells Fargo’s retirement plan business further reduced the list of recordkeepers from which plan sponsors can choose.

The trend of recordkeeper consolidation has been ongoing since at least 2009. In fact, an analysis of the top 20 recordkeepers by assets in 2009 versus 2017, performed by Brian O’Keefe, PLANSPONSOR’s director of research and surveys, finds only four have not pursued an acquisition-based growth strategy.

O’Keefe notes that there seems to have been thematic windows of major consolidation. “The first window appears to have been from 2000 to 2006, when a lot of ‘unintentional derivative businesses’ were sold off—books of business relating to companies that have different core businesses, such as PwC, Aetna, Cigna, American Express, Northern Trust and Dreyfus, for example,” he says.

O’Keefe observes a second window from 2008 to 2010, when companies combined administration with other services in hopes of creating compelling experiences for the employer or participants. “You had the strengthening of providers offering ‘financial solutions’—for example the Wells Fargo/Wachovia Bank deal, the ING/CitiStreet deal, and the Bank of America/Merrill Lynch deal—and providers offering ‘employer solutions’—for example the Aon/Hewitt Associates deal and the Xerox/Affiliated Computer Services (ACS) deal,” he says.

According to O’Keefe, the next window appears to have run from 2012 to 2015 as a scale and positioning attempt, during which providers sought to achieve even greater economies of scale. Empower Retirement scooped up Great-West, which had previously acquired Putnam’s and J.P. Morgan’s recordkeeping business; MassMutual acquired The Hartford’s retirement plan business; and Transamerica and Diversified Investment Advisors, which had been consolidated, picked up business from Mercer.

O’Keefe’s analysis leads him to wonder, “What will 2028 look like?”

Robyn Credico, managing director of retirement at Willis Towers Watson, in Arlington, Virginia, says the primary reason for recordkeeper consolidation is that recordkeeping is not a big money-making business on its own. “Some providers want to get out of the business, some want to create scale because the more leverage and infrastructure, the more money a provider can make, and some want to move up market to serve larger plans,” she says.

Credico says that since there are not so many companies left, she doesn’t know how much more consolidation there will be, but she still thinks there will be some offloading of the recordkeeping business to focus on other business. She adds that she expects some smaller recordkeepers will issue an initial public offering (IPO) instead of being acquired.

“In the large plan market, there are not even that many vendors left. Some do all things themselves, so they wouldn’t be in acquiring mode,” Credico adds.

Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco, believes recordkeeper consolidation has a lot to do with a broader consumer awareness of fees involved with various parties in the defined contribution (DC) plan recordkeeping market. “Recordkeeping, third-party administration, directed trustees, consultants to plans, advisers, actual investments themselves—when you add all that up, it can be quite expensive to administer a retirement plan,” he says. “When things started to change in the 2000s with fee disclosure rules from the Department of Labor (DOL) and increased transparency required, plan sponsors became more educated as to what they should be looking for and providers realized that in a more competitive environment they couldn’t afford to continue to charge what they had charged. They had to provide a more competitive offering, and one way was to consolidate and remove redundancy and align costs with the services provided.”

Parks adds that something retirement plan service providers asked themselves is what business they are in and how they want to make money. For example, investment providers realized they could use recordkeeping to have assets flow into their asset management business, but over the years they realized recordkeeping is complicated—and that demanding clients want complex administration support. But, if one looks at the constant top four or five recordkeepers today, they are clearly in the investment management business foremost, but found a way to break even at least on recordkeeping and fuel their investment management business. “Principal is a recordkeeper but also has trust management and other businesses. Principal’s move is saying it wants to stay a big player,” he says.

According to Parks, the demographic shift will have an impact on consolidation. Baby Boomers are entering their retirement years and starting to draw down retirement plan assets and Generation X and Millennials have competing financial priorities and are not saving as much, so recordkeepers have a risk of revenue declining as assets decline. “In 10 years, savings may not make up for the difference in outflows. A macro look sees consolidation is the forerunner of a business model shift, and going forward, recordkeepers will realize they have to charge a flat fee,” he says.

What recordkeeper consolidation means for plan sponsor service

“In general, I think plan sponsors will see improved services due to recordkeeper consolidation because typically the acquiring company would look at services offered by itself and the organization it acquired and pick the best of both worlds,” Credico says.

She adds that typically when one company acquires another, it commits to still charging fees of the acquired company. She notes that, in general, service provider fees have been getting compressed over the last several years, which is why some recordkeepers have gotten out of the business. But, Credico says, it appears fees could be leveling off now.

As for benchmarking or requests for proposals (RFPs), Credico notes there continues to be a smaller group among which to benchmark a comparable plan, and as far as a vendor search, there are fewer providers to compare. “One might expect that with less competition fees could increase. At some point, from a business perspective, the recordkeepers left standing will have to make money and will have to decide whether or not to raise fees,” she says.

She adds, “But, I don’t think that’s a bad thing. Plan sponsors don’t want their recordkeepers to go out of business.”

Parks wonders whether, with fewer choices in recordkeepers, plan sponsors will still have the ability to command the experience they want or to negotiate pricing. Recordkeepers will have to further differentiate themselves when there are fewer to pick from.

He predicts there will also be movement and consolidation at the software level. According to Parks, there hasn’t been much major improvement or investment in recordkeeping systems for decades. “How do recordkeepers deliver good experience with lower revenue and outdated software? There is some movement to build platforms, but it’s a major investment and not all can do that,” he says.

“Recordkeepers will see demand from plan sponsors that will drive change, but it will take time because modifying a 20-year software system is not easy,” Parks adds.