Record keeper consolidation has slowed if measured by the number of deals. If measured by participants or assets, it will be a banner year just with the sale of The Hartford to MassMutual alone.

The 2012 defined contribution consolidation list (see p. 19) details significant deals since 1999 that refute many experts' predictions of even greater attrition. There is no doubt that the DC record keeping industry is bloated, with 46 national firms and only 19 in "401(k) heaven" as measured by assets and participants under management. Will record-keeper consolidation pick up and will the consolidation bug hit DCIO (investment only) firms as well as broker dealers and plan advisers? What are the drivers of consolidation and what are the effects?

It's hard to imagine that there will be 46 record keepers with a national presence in five years and, for that matter, that there will be more than 600 regional record keeping TPAs. With costs declining as a result of greater fee disclosure rules, commoditization and market pressure, only record keepers with significant assets, participants and resources that have the technology and processes in place to keep lowering costs can continue to make substantial investments in technology and distribution. There are fewer than 50 regional record keeping TPAs with more than $750 million under management, but even small ones can make money because technology is cheaper and they don't overspend on distribution.

But TPAs are aging, and larger firms looking to monetize their business as smaller ones feel pressured to reach scale by running a high risk/low reward enterprise.

Look for smaller national record keepers to wave the surrender flag, especially those attached to larger financial institutions that will grow weary of thin margins or losing money while they could be deploying the capital and focus on higher margin businesses. No longer will many, if any, CEOs be seduced by the promise of IRA rollovers or retirement income to stay in the market.

Record keepers focused on only one market segment by plan size will be forced to move up or down either through acquisitions, like MassMutual's pending purchase of the Hartford down market, or through organic growth, like John Hancock, to move upmarket.

Payroll companies and banks have a distinct advantage over mutual fund companies without significant penetration into the target-date market, as well as small market insurance companies whose plans would lose an average of 50 Basis Points if they went to market. Firms with private equity owners or investors will have to be sold, by definition, and those with minimal assets but large sales forces will be under greater pressure to grow or face the harp music as their C-suite executives grow tired in the waiting room of 401(k) heaven.

Though 46 national firms and more than 600 regionals seems awfully bloated for a mature market, the 401(k) and DC markets are like the San Francisco weather - there are many submarkets or sub climates. Not only is the DC and corporate retirement market divided by plan or company size, there are many plan types, like DB, 403(b), 457, Non-Qualified and Taft Hartley, as well as service models like bundled and unbundled.

Record keepers who can leverage infrastructure, technology and senior management costs across markets have a distinct advantage. Those vendors that do not have the culture, distribution and senior management familiar with and able to sell to plan advisers in the under-$250 million market will be disadvantaged.

So what will significant consolidation mean to plan advisers and their clients? Look for less innovation, if that's possible, fewer wholesalers, less choice and even higher prices, eventually. Some providers may get a "corner" on a sub-market with advisers and plans chasing them - hard to imagine, but think about booking flights on a route serviced only by one airline. Service will dwindle as fewer employees making less money will have to service more clients - not a happy group. The migration of top record-keeper wholesalers will continue, and all those nice tools, trinkets and junkets will begin to disappear. The end game or ultimate consolidation is the Thrift Savings Plan, which only costs 2 Basis Points and may be overpriced for the service and choice participants get.

Lest DCIOs, broker dealers and plan advisers look on in relief like survivors of a tsunami as national record keepers not in 401(k) Heaven drown, the next wave could be hitting them, and soon. DCIOs are feeling the pressure to pay more revenue sharing to record keepers as their margins grow thinner, as well as pick up a greater percentage of the cost of value-add resources.

Less than 40 DCIO firms compete in the adviser-sold DC market and only 11 are in their own version of DC heaven. It's harder to gain entry into the DC market, as the platforms have fewer people to conduct investment due diligence and there is less demand for new funds. Especially with the growth of TDFs and other asset allocation funds. Broker dealers now have to deal with the realities of 408(b)(2) fee and fiduciary disclosure, forcing many to question whether they really want to be in the DC market with less than 40 firms that have at least one person dedicated to supporting plan advisers.

Successful plan advisers in the small market have to manage a lot of plans, which also takes people, resources and capital. Advisers have fewer opportunities to get to scale leveraging resources and infrastructure like record keeper, IOs and even broker dealers because they are basically in the consulting business, which demands high personal touch. Savvy plan advisers will learn from the right provider partners. Be careful to pick those on the right side of consolidation or get swept away in the coming DC consolidation tsunami.

Barstein is founder and executive director of The Retirement Advisor University in collaboration with UCLA Anderson School of Management Executive Education. Reach him at Fred.Barstein@TRAUniv.com.

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