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The pace of recordkeeper consolidation shows no signs of abating. Last year's headline-grabbing deals, such as Empower's purchase of MassMutual's and Fifth Third Bank's recordkeeper business and Franklin Templeton's acquisition of Legg Mason's recordkeeper unit, are expected to continue a decades-long trend.
"It's very hard to make money in this business, especially with the continued investment in technology that's needed," explains Robyn Credico, defined benefits consulting leader with Willis Towers Watson. "Then you add in financial wellbeing. You need something to be able to keep up and also make you stand out."
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Only large players can afford those investments without certainty around their returns. They in turn need additional plan participants to spread out fixed costs in light of mounting fee compression.
But where does recordkeeper consolidation leave plan sponsors, participants and advisors?
Plan sponsors: A chance for lower fees––for now
For the moment, recordkeeper consolidation has created a pricing war for recordkeeper services that can allow plan sponsors to lower their plan's overall costs.
"The surviving recordkeepers are trying to price bids so they can lure plan sponsors away from other players," says Jana Steele, a defined contribution consultant with Callan. "We've seen a lot of benchmarking work this year in response to that."
Pricing is so aggressive now that Steele calls it "a bubble." But that's not likely to last. "Eventually we will end up with a couple of behemoths and will [recordkeepers] end up controlling pricing more?" says Steele. "It could end up being an issue."
Credico of Willis Towers Watson agrees and believes plan sponsors must be vigilant on pricing going forward: "There are less options, which means the client maybe has less access to competitive pricing," she says. This could be especially true for small plans who don't have the clout to push back.
According to CapTrust, there are just 150 or so retirement plan recordkeepers, down from 400 a decade earlier.
Surviving recordkeepers must honor the terms of the contract that plan sponsors have in place. But when that expires, there's an opportunity to renegotiate. Plan sponsors have a fiduciary duty to make sure that the new recordkeeper continues to be the best option for their participants.
Steele of Callan says she expects 15% to 20% of plan sponsors to find a new recordkeeper following a merger. Further, "I would expect 40% to 50% [of contracts] to go out for bid within a two-year window after an acquisition," she says.
Plan participants: More sophisticated technology offerings
With financial wellness front and center for most retirement plans, acquisition by a larger recordkeeper could mean better access to these types of services for more plan participants, say observers. Larger recordkeepers have the financial wherewithal to invest in better technology such as mobile apps that can improve employee financial education and help them invest better.
"We've seen a K-shaped recovery in the pandemic, with some people doing great, working from home and so on and some people completely devastated financially," says Rebecca Hourihan, chief marketing officer with 401(k) Marketing, a firm that helps financial advisors market to retirement plans. "Financial wellness is now critical on both sides of the K equation."
As recordkeepers build out more capabilities, they'll introduce greater automated processes, believes Steele.
"Take the backdoor IRA option," she says. "In the past you had to call and fax to make it happen, but in the last 10 months I've seen two recordkeepers who can do it now and a third is exploring it."
But consolidation doesn't automatically mean improved innovation, says Hourihan. There are still technology hurdles to overcome for recordkeepers to provide optimal services. One of the biggest is integration with payroll. If a plan participant changes their deferral rate–not an uncommon event during times of financial stress–it can take several weeks for that change to be reflected in their paycheck.
"This is something we would have expected to be in place at the turn of the century," notes David Ramirez, co-founder and chief investment officer of ForUsAll, which fills in gaps in recordkeeper services for plans.
Plan sponsors can use mergers as opportunities to assess all recordkeeper services and negotiate additional ones.
Financial advisors: An opportunity for more engagements
For advisors who work with retirement plans, the rapid pace of M&A activity can mean a business boom.
"It's an advisor prospecting opportunity for sure," says Hourihan. "If you follow the structure of an investment policy statement, whenever there's a change of an investment manager, you would look at investments. The same fiduciary process would apply when there's a change of recordkeeper."
As plan sponsors must undertake the due diligence process to evaluate the new entity, they are likely to seek out the assistance of their advisors. And should the new recordkeeper be deemed not satisfactory, advisors will be asked to help their clients assess new partners.
On the other hand, advisors could see rising competition from more robust recordkeeper services, especially those offering more ancillary services such as robo-advice or student loan management. The best defense is to be proactive, says Hourihan.
"The advisor could use this as an opportunity to get in front of employees with employee education, auto-enrollment and managed accounts," she says. "It can be a great opportunity for advisors."
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