hands shaking over technologyBesides observing recordkeeper integrationchallenges, a subtle but consequential shift seen byglobal consultancy McKinsey is a movementtoward leaders with a tech background. (Photo:Shutterstock)

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The Principal Financial Group's acquisition of Wells Fargo's 401(k) recordkeeping unit for $1.2 billioncould result in expansive growth of the former's footprint amonglarger retirement plans.

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According to PlanSponsor's 2017 recordkeeping survey, DesMoines-based Principal administered about 52,600 plans in 2016.Nearly 90 percent of those plans, or about 47,200, had less than $5million in assets.

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Principal was recordkeeper to 192 plans in the $100 millionto $500 million segment, and 34 plans with more than $500 millionin assets.

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With the acquisition of Wells Fargo's institutional and retirementtrust business, Principal could more than double its stake amonglarger plans. Wells' IRT unit was recordkeeperto 248 plans with $100 million to $500 million in assets,and another 54 plans with more than $500 million in 2016, accordingto PlanSponsor.

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Continued consolidation despite 'spotty' track record

Across the industry, stakeholders expect the quest for scalewill motivate further recordkeeper consolidation in the foreseeablefuture.

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But new analysis from global consultancy McKinsey &Co. says previous acquisitions have a “spotty” track record inrealizing cost savings through acquisitions.

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“We believe there will be continued consolidation in industry,”said Alexander D'Amico, a partner in McKinsey's financial servicespractice.

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That could come in several forms. The strong could get strongerthrough organic growth, and middle and back-office providers thatsupport recordkeepers could see consolidation.

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But more mergers and acquisitions among the 35-plus nationalrecordkeepers, and scores of other regional providers, is alsoexpected.

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“From a pure recordkeeping standpoint, there is excess capacity.But that doesn't mean all of these recordkeepers are not makingmoney,” D'Amico told BenefitsPRO.

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Notwithstanding the challenges experienced in previousacquisitions, M&A brings the potential to create meaningfulvalue through scale, access to new market segments, and newdistribution for proprietary investment products.

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But the propensity to miscalculate challenges to integration hashampered acquiring companies.

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“The ability to significantly impact cost improvements has beenmore difficult than presumed,” said D'Amico, co-author ofMcKinsey's report. Neither he nor the report cites challenges seenin specific deals.

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“A number of challenges can be easily underestimated, andsolving them can be more complex and expensive that what deal teamsmight have anticipated,” he added.

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Reducing headcount among redundant positions in the merged firmswill create natural anxieties, particularly among the acquiredfirm. That tension can cripple integration. Specific numbers onheadcount reductions in previous deals don't necessarily portendwhat will happen in future deals, said D'Amico.

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“In any efficient process, a good acquirer takes a holistic viewof both sides of the deal as they develop a new operating model andlook to leverage the best in both firms,” he said.

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“But it really does vary by deal. When you are acquiring arecordkeeper in the market you are already in, that lends itself tomore readily captured cost synergies, more than acquiring aprovider in a new market,” added D'Amico.

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Then there is the question of spooking the advisors,intermediaries, and plan sponsor clients impacted by theacquisition.

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“As soon as a target is out for bid, or even rumored to be upfor sale, competitors will attack that target's sponsor anddistribution relationships. That happens quickly. This is a marketwhere rumors move early and competitors are quick to pounce.”

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In some cases, money managers and other providers put potentialacquisition targets on watch lists. From a revenue perspective,that can start to put the acquiring firm in a position of weakness.It's vital for acquiring firms to get ahead of those realitiesquickly, said D'Amico. Outreach to potentially skittish sponsorsand intermediaries needs to begin from the C-Suite of the acquiringfirm, and executed at the executive level, Mckinsey's papersays.

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The deal between Principal and Wells reportedly included up to$150 million in incentives tied to better-than-expected clientretention.

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Underestimating the challenge of platform, serviceconsolidation

Administering workplace retirement plans has evolved into anintensively tech-driven proposition.

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Consolidating platforms, and the supporting human and ITcapital, is as pivotal of a challenge as any in recordkeeperacquisitions.

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“It's easy to overestimate the ease of consolidating platforms,which is common in large IT integration across all industries,”said D'Amico. “The downside is not always fully understood.”

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With some deals, fully consolidating platforms has proven toodifficult, and acquiring firms have had to leave workaroundsindefinitely in place.

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It's also common for selling firms to stop investing in theirplatform and supporting infrastructure long before the acquisition,creating more integration issues.

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Call centers too have to be integrated. In one option, themerged call center is effectively bifurcated—one portion forincumbent clients, another for acquired clients.

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But that too requires investment in training call centeremployees, and can potentially diminish capacity when spikes incalls occur.

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The good news, says D'Amico, is that all of the challenges aresolvable.

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“But there needs to be complete due diligence in the systems youare acquiring, from the integrity of data to data architecture, andhow easily it can be migrated,” he said.

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A subtle but consequential shift McKinsey is seeing in theleadership of recordkeeping firms is more talent with a techbackground rising to the top. Traditionally, leadership has beencultivated from the distribution side of the business.

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“Executives increasingly understand these are tech intensivebusinesses. With that appreciation, they will pay more attention tothe technology and the architecture behind what they are buyingthan industry has in the past,” said D'Amico.

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Challenges in previous acquisitions do not necessarily mean thedeals were inaccurately priced.

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“Each deal turns on a number of idiosyncratic points,” saidD'Amico. “It's hard to say there has been systemic over or undervaluing in the relatively small sample of acquisitions thatexist.”

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READ MORE:

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Big 401(k)s shedding pro rata recordkeepingstructure

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Health care M&A starts off with a bangin 2019

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