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PlanSponsor: 401k Recordkeeper Consolidation Creates a Smaller Pool of Plan Sponsor Choices

Dylan Telerski / 25 Apr 2019

The trend of retirement plan 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.

These consolidations have happened in three major windows:

  • The first window happened between “2000 to 2006, when a lot of ‘unintentional derivative businesses’ were sold off—books of business relating to companies that have different core businesses,”
  • The second window happened between “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’…and providers offering ‘employer solutions’”
  • The third 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.”

The question is: what will the retirement industry of the future look like in the future?

Ubiquity Retirement + Savings founder and CEO Chad Parks 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. 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.

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© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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