There is almost no one who doubts there will be fewer record keepers in the next three to five years, with the current roster of over 40 national firms and 200 regional record keepers unsustainable.
The recent sale of OneAmerica to Voya at record low prices after robust deals by Empower for MassMutual’s and Prudential’s record-keeping divisions likely has the C-suite owners of second and third-tier providers with little to no chance of making it to the top, wondering if it is time to get out.
And while it might not be the fault of advisors who place or do not move plans from a provider like OneAmerica that exits, it is their problem. Not only will clients blame them, but other advisors will attack those plans on the move.
Wholesalers are like the giraffes of the Serengeti who can spot danger way before others, so when they get spooked—either leaving a record keeper or stop aggressively selling, knowing they are about to exit—it is a clear sign for advisors to investigate.
Record keepers without scale, robust proprietary products, unique distribution or the ability to cross-sell wealth services are at risk. Record-keeping costs will continue to decline if there is excess capacity exposed by advisors who conduct thorough RFPs. Benchmarking only is okay for smaller plans, but for the rest, it masks bad behavior promoted by record keepers or advisors who are too lazy to do the real work or afraid of the results.
Different market segments act differently, especially the micro market dominated by payrolls that have in-house capabilities like ADP, Paychex and now Gusto after the purchase of Guideline, as well as those that partner with firms like Vestwell, Human Interest, Betterment and 401Go. Traditional record keepers use TPAs but cannot compete on pricing hindered by legacy technology and less streamlined processes even though they have greater levels of service, making them attractive to broker/dealers whose wealth advisors need hand holding.
Alight and Conduent focus exclusively on mega plans where margins are razor thin. TIAA and Corebridge that focus on 403(b) plans, with competition growing from 401(k) providers, and there are others like Equitable and Lincoln that also work in the non-ERISA K-12 market.
The remaining 401(k) markets are a red ocean, where competition is fierce and will only intensify as providers compete with advisors for participant services. Of the remaining 25 record keepers, only five have over 10 million or more participants, including Fidelity, Empower, Vanguard, Voya, and Principal. Others, like Charles Schwab, are successfully leveraging the convergence, while American Funds, which outsources record-keeping, has unparalleled and massive advisor distribution. T. Rowe relies on proprietary products, especially its target date funds series, which is one of the largest, and may be concerned that a sale of their record keeper could result in a loss of assets—they have signed a massive outsourcing deal with FIS.
There are national banks with tens of millions of clients, many with wealth management capabilities but only JP Morgan with a large TDF series and Bank of America with Merrill remain viable 401(k) record keepers while some providers owned by regional and community banks like Alerus, BPAS and EPIC are holding their own not needing to compete nationally with a much lower cost basis offering non-interest revenue.
Firms like Transamerica provide benefits and insurance products and are a leader in group plans while Manulife John Hancock recently launched a new platform along with a partnership with Vestwell, which, while not immediately replacing their TPA/annuity and mid market mutual platforms, provides a long term solution for all clients. And, of course, Ascensus has an interesting and profitable business, but organic growth may not be robust enough to go public, given its heavy reliance on Vanguard for new plans and the absence of meaningful proprietary products or wealth services.
Who are the buyers?
Fidelity, Vanguard and Schwab have not bought record keepers in the past, while Empower is focused on acquiring wealth firms that complement Empower Personal Wealth. The Standard bought Securian, but is that enough to vault them into the top tier? Principal is due after the Wells Fargo deal in 2019, while Voya is still integrating OneAmerica. Parthenon, which owns EdgeCo and American Trust, had been acquiring smaller providers but has been dormant lately, leading others to wonder whether consolidating smaller and regional record keepers is viable.
As larger providers get scale, cost savings diminish with each acquisition. The holy grail is offering participants wealth services, which competes with 70% of RPAs and the growing 50,000+ wealth advisors who have significant 401(k) practices. Depending on the business models and market focus, the list of viable record keepers may be limited. It’s hard to ignore firms that have massive market share and capabilities, even if they compete with advisors for participants.
Advisors need to narrow their partnerships to record keepers, first, not likely to exit the market, but also are willing to collaborate with reasonable rules of engagement, allowing for both parties to make money, which requires advisors to have scale, savvy and determination as providers go through the same process themselves.
