Defined Contribution Recordkeeper Consolidation Continues

Empower Retirement recently announced an agreement to acquire Prudential’s retirement plan recordkeeping business. The acquisition promises to capitalize on both firms’ experience and expertise to the benefit of retirement plan participants and plan sponsors. This announcement follows Empower’s earlier acquisitions of MassMutual’s and Fifth-Third Bank’s recordkeeping businesses and has become representative of the retirement plan recordkeeping industry over the last two decades.

Industry experts believe there is more to come. Narrow profit margins, increased technology requirements, and greater customer demands all push recordkeeping providers to generate increasingly greater scale and make significant sustained investments in technology, product offerings, and the customer experience to keep pace.

Retirement plan recordkeeper consolidation has accelerated since the early 2000s, beginning with acquisitions of smaller entities unable to keep pace with evolving customer needs and product sophistication. Just in the past decade alone, we have seen Wells Fargo’s acquisition by Principal, Empower’s acquisition of Putnam and a large portion of JP Morgan’s recordkeeping business, MassMutual’s acquisition of The Hartford, Transamerica acquiring Diversified Investment Advisors and Mercer recordkeeping services, and John Hancock purchasing New York Life Retirement Plan Services.

Getting to Where We Are

While defined contribution plans have been in existence for some time, major changes have taken place since Congress passed The Revenue Act of 1978, clearing the way for the establishment of 401(k) and 457(b) Plans. The change proved to be revolutionary, but recordkeeping at that time required only quarterly paper statements and there was no participant-directed investing.  

The next evolutionary step for defined contribution plans was driven by the mutual fund industry in the early 1990s.  Recognizing a massive opportunity to capture assets, these firms moved to put control of the investments into the hands of plan participants. Once individuals were making the investment decisions, the demand for more frequent information and access naturally developed into daily recordkeeping and 24/7 access.

The most dominant recordkeepers in that era were the mutual fund managers and insurance companies whose primary interests were to sell their investment products. The American retirement landscape was more of a vehicle for product distribution than a well-considered program to produce retirement-ready participants.  

In the early 2000s, the emergence of independent retirement consultants and investment advisors to the defined contribution plan market began to change the industry, albeit slowly, by promoting more fee awareness. This began to move focus of the available investments away from each recordkeeper’s proprietary products. The goal was fee transparency and “open architecture investment menus. Open architecture is the ability to use investments provided by more than a single fund family or insurance company. Originally, only the largest companies could afford this luxury, but over time, open architecture has become the prevailing norm.

All of this brings us to where the retirement plan industry is today:  one pieced together by product providers, growing demand, and governmental oversight.  As regulation and client demand have stretched margins thin, we see recordkeepers taking large-scale action, whether by acquiring, merging, outsourcing, or simply exiting the business.

The Reasons for Consolidation

There are many reasons to buy or merge with another recordkeeper. Most successor firms are looking for market share or access to market segments where they are not strong. Acquiring a competitor’s superior technology or systems is also a common goal.  

The industry is becoming increasingly complex. Aggregate recordkeeping fees continue to decline — despite consolidation — requiring firms to do more with less. It is a scale business and it can often be more successful to acquire a book of business than to try to grow the book of business.

The industry's buyers have very robust technology systems. The technology demands have increased as the risk of cybersecurity increases. In the past, recordkeepers had to improve technology to provide new services, but now there is also greater emphasis on protecting participant data and assets. Vulnerable recordkeepers are those who have not been investing in their technology.

As a means to remaining technologically competitive, some recordkeepers have pursued strategic partnerships or outsourcing solutions rather than in-house development or acquisitions within the industry. In 2020, Vanguard announced such a partnership with technology firm Infosys for its recordkeeping services.  MissionSquare Retirement (formerly ICMA-RC) announced a similar recordkeeping partnership with Windsor, Connecticut-based SS&C. This is an alternative approach to continually enhance service and increase scale.

But Where does Consolidation leave Plan Sponsors and Participants?

The hope is that these continued transactions are a positive for the industry, leading to enhancements in technology and services, with economies of scale driving better experiences and outcomes for plan sponsors and their participants. 

Recordkeeping margins have tightened, in part due to the continued investment in technology that’s needed to stay current. Additionally, the newfound focus on financial wellbeing also requires firms to expand their participant interaction. With financial wellness front and center for most retirement plan sponsors, consolidation could mean better access to these types of services for more plan participants.

But consolidation doesn’t automatically mean improved innovation. Furthermore, the recent frequency of these changes and the different benefits and challenges that can come from each transaction make it as important as ever for plan fiduciaries to perform periodic due diligence of the marketplace.

Regardless of the reason or the strategy implemented by providers, many plans may find themselves using a different recordkeeper than the one selected five years prior, through no proactive choice of their own. Plan sponsors should use mergers as opportunities to assess all recordkeeper services and negotiate additional ones. For advisors who work with retirement plans, the pace of consolidation may mean activity. As plan sponsors undertake the due diligence process to evaluate the new entity, they are likely to seek out the assistance of the experts. And should the new recordkeeper be deemed not satisfactory, advisors will be asked to help their clients assess new partners.

About the Author:

Dustin Roberts, MBA, QKA, AIF, is a Vice President and Consultant at Innovest Portfolio Solutions. He is a member of the firm’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. Roberts holds the Qualified 401(k) Administrator designation from the American Society of Pension Professionals and Actuaries, as well as the Accredited Investment Fiduciary (AIF) designation from Fi360. He earned his bachelor’s degree from Bradley University and his MBA from the University of Colorado Leeds School of Business. Prior to joining Innovest, Roberts partnered with clients in account management and retirement plan consulting roles at Empower Retirement, Aspire Financial Services, and Unified Trust Company. He volunteers with Junior Achievement – Rocky Mountain, facilitating various programs, and Delta Upsilon International Fraternity, where he currently serves on the Board of Directors.

Innovest is a Consultant member of TEXPERSThe views and opinions contained herein are those of the author, and do not necessarily represent the views of  TEXPERS. These views are subject to change.

Innovest is a Registered Investment Adviser registered with the US Securities and Exchange Commission.

Unless explicitly stated to the contrary, the material herein is not intended to provide and should not be relied on for investment advice. Under no circumstances are we ever providing tax, accounting or legal advice.

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