Principal Financial Group announced a definitive agreement with Wells Fargo & Company to acquire its Institutional Retirement & Trust business.

At closing, Principal will assume ownership of Wells Fargo’s defined contribution (DC), defined benefit (DB), executive deferred compensation, employee stock ownership plans (ESOPs), institutional trust and custody and institutional asset advisory businesses and serve a combined 7.5 million U.S. retirement customers.

“Retirement is at the heart of our business and core to our future,” says Dan Houston, chairman, president and CEO of Principal. “This will be a powerful combination for customers, employees and shareholders as we solidify our place as a top-three leader in the U.S. retirement market. The acquisition will bring expanded capabilities, reach and scale; fueling our ability to compete, invest and grow to help more people to achieve their retirement outcomes.”

Through this acquisition, Principal will double the size of its U.S. retirement business by the number of total recordkeeping assets, while bringing on institutional trust and custody offerings for the non-retirement market. In addition to increased scale, Principal will gain a strong foothold with mid-sized employers as more than two-thirds of Wells Fargo’s institutional retirement assets are in plans ranging from $10 million to $1 billion. Principal expects to be well-positioned to deliver a broader set of solutions and capabilities to its customers, strengthen investments in digital technologies and automation, and recognize materially significant synergies and efficiencies.

As of December 31, 2018, the respective Wells Fargo retirement businesses had $827 billion in assets under administration served by approximately 2,500 employees in locations across the U.S., Philippines and India.

In a conference call with reporters held shortly after the announcement of the deal, executives with Principal Financial Group gave some details about the various anticipated “revenue synergies” they expect in the short- and long-term as a result of this large acquisition. The expectation is that there will be both positive and negative impacts on revenue. On the positive side will be the efficiencies that come from combining the skillsets and client bases of the two well-known organizations, which historically have had somewhat different focuses when it comes to their target segments of the retirement plan business. On the other hand, the Principal executives noted there could be some short-term challenges in terms of creating real process integration and ensuring existing clients remain on board as the transaction unfolds.   

The Principal team expects to give updates on these matters throughout 2019 and beyond, and they say it will obviously take a significant period of time for all of the nuances to play out. In absolute terms, the team expects to see net revenue gains around $425 million at 36 months after the closing of the deal.

Zooming into the retirement plan portion of the deal, the executive team notes that the combined organization will serve 56,000 plans. They say the presence of Wells Fargo funds in plans also recordkept by the firm is smaller than the proprietary fund presence in plans using Principal as the recordkeeper. The executive team says it will benefit the expanded Principal organization to have this diversity and balance in the client service structure. The combined firm hopes to be competitive as both a recordkeeper and an asset manager. 

The Principal team further points to the annuity business as another important synergy area. In simple terms, clients are looking for lifetime income in retirement, and this will be a big focus of the unified organization. As a related result of this focus on annuities, the combined firm expects to be in an even stronger position to support clients in the non-qualified deferred compensation (NQDC) realm, wherein life-insurance vehicles can be a tax- and cost-efficient funding solution.

According to the Principal executives, thinking about the impact of this deal on the firms’ relationships with the retirement plan consultant and adviser community was also a critical component in reaching the conclusion to pursue the acquisition. The presence and role of advisers remains significant in the middle market, they explain, and so the firm is expecting to work closer with the consulting channel to bring expanded capabilities into the marketplace.

According to the most recent PLANSPONSOR Recordkeeping Survey, Wells Fargo and Principal on their own rank 10th and 8th, respectively, on the list of largest recordkeepers by DC plan assets serviced. Principal alone ranks fifth-largest both in terms of plans and participants, while Wells Fargo ranks 34th in terms of plans and 9th in terms of participants.

According to the survey, about 25% of Wells Fargo plans were directly sold, while 75% were intermediary sold. For Principal, these figures are 1% and 99%.