The 401(k) Record-Keeping Landscape: A Shifting Terrain
The world of 401(k) record keeping is undergoing a fascinating transformation, and it's not just about numbers and acquisitions. The recent slowdown in consolidation, with a potential exception of Ascensus' move for American Trust, reveals a deeper story of changing business models and shifting valuations. What's happening behind the scenes is a strategic evolution, and it's worth exploring.
Consolidation Lull and the Big Paydays
One thing that immediately stands out is the halt in the consolidation of 401(k) record keepers. With over 40 national and 200 regional players, the market seems ripe for consolidation, but buyers are scarce. The golden days of lucrative exits, like MassMutual and Prudential's deals with Empower, might be fading, as evidenced by Voya's acquisition of OneAmerica's DC business at a surprisingly low price. This shift in valuations could be attributed to various factors, including the rising costs of record-keeping and the pressure to reduce fees, forcing many to diversify into participant wealth services.
Advisors and the Giraffes of the Industry
Advisors play a crucial role in this evolving landscape. Plan sponsors rely on retirement plan advisors to navigate the complex web of providers and avoid those likely to exit, causing messy conversions. Interestingly, advisors turn to wholesalers, the 'giraffes' of the industry, for insights on potential exits. This dynamic adds a layer of complexity to provider due diligence, as advisors must now predict which providers are at risk of exiting, on top of evaluating fees, funds, and fiduciary services.
American Trust and the Roll-Up Strategy
The story of American Trust is particularly intriguing. Founded by industry veteran John Moody, it aimed to consolidate smaller, regional record keepers. After acquiring First Mercantile and Mid Atlantic Trust, Edgeco (the parent company) continued this roll-up strategy by acquiring Lincoln Trust and Unified Trust. However, the challenge in finding buyers for these third-tier record keepers suggests a shift in market appetite.
Ascensus' Strategic Moves
Ascensus, under new leadership with Nick Good as CEO, is making bold moves. Their acquisition of American Trust, a trust and custody business serving RIAs, at a premium, signals a potential shift in strategy. While Ascensus has traditionally focused on tech and services, avoiding asset-based fees and investment products, the hiring of Josh Rundle and American Trust's wealth services capabilities hint at a new direction. This could potentially put them in competition with advisors, especially as they venture into wealth services like IRA rollovers and RIA support.
The Quest for Scale and Complimentary Businesses
The industry is witnessing a shift in consolidation drivers. While scale was once the primary motivator, the landscape has changed. Those with scale no longer need it, and those without are struggling to achieve it. Instead, complementary businesses are gaining prominence. Empower's acquisition of Personal Capital and their hunt for a national RIA is a testament to this trend.
RPAs and the Evolving Provider Landscape
RPAs must navigate this evolving provider landscape with caution. With providers diversifying into wealth services, as highlighted by the McKinsey report, RPAs face potential competition from advisors. The survival of providers now depends on their ability to adapt and offer ancillary services that cater to employers and employees. The days of relying solely on plan fees are numbered.
The Future of 401(k) Record Keeping
In my opinion, the future of 401(k) record keeping is about strategic diversification and adaptability. Providers must either develop wealth services or risk becoming uncompetitive. This shift will impact RPAs, who will need to carefully select provider partners with long-term viability and fair competitive practices. The industry is at a crossroads, and the choices made today will shape the retirement planning landscape for years to come.
Personally, I find this evolution fascinating. It's a reminder that in the world of finance, standing still is not an option. The 401(k) record-keeping industry is undergoing a strategic makeover, and those who adapt will thrive in this new era.
