Great-West walking new path to growth

Growth of Great-West Financial's record-keeping business will be organic from now on, even though the company gobbled up J.P. Morgan's large-plan defined contribution business and merged Putnam Investments' record-keeping business into Great-West's.

“We have the pieces we need, so all of our discussions are, 'let's grow this business organically,''' Robert L. Reynolds said in an interview. Mr. Reynolds is president and CEO of Putnam Investments LLC, Boston, and Great-West Lifeco U.S., Great-West Financial's U.S. operations and holding company. In May, he will become president and CEO of Great-West Financial. Putnam and Great-West Financial are both owned by Great-West Lifeco Inc., Winnipeg, Manitoba.

Mr. Reynolds added: “But I think to say, 'We'll never make an acquisition,' is too big a statement to make.”

The combined record-keeping business will have $387 billion in assets under administration for 6.8 million participants, according to Pensions & Investments data. That makes Great-West Financial, Greenwood Village, Colo., second only to Fidelity Investments, Boston, which had $1.3 trillion in AUA and 16.7 million participants as of Sept. 30, P&I survey data show.

“They've got a long way to go to make it to that No. 1 spot,” said Rick Meigs, founder and president of 401khelpcenter.com, LLC in Portland, Ore. But he added: “Fidelity's been in a bit of a malaise of late. A general sentiment among industry insiders is that Fidelity lacks direction and focus, thus no clear vision of where it should be a player.”

He also said he's “sure” that Great-West will make more acquisitions.

Steve Patterson, executive vice president of sales for workplace investing at Fidelity Investments, told P&I: “Our commitment to retirement services has never been better. Our clients don't care if we're the biggest, they want the best fit for their specific needs.”

He noted that in 2013 Fidelity retained 98.7% of its DC clients and won $45 billion in commitments from 1,700 new customers, and is “on a similar pace for 2014.”

“Our results speak for themselves,” said Mr. Patterson. “Nobody comes even close.”

On the asset management side, Great-West/Putnam isn't making any acquisitions but isn't abandoning plans to increase assets under management, Mr. Reynolds said.

“We're concurrently growing our money management business,” he added.

Great-West Lifeco has $468.21 billion in AUM; Great-West Financial had $59.4 billion in AUM at Dec. 31.

Putnam had $150 billion in assets under management at Dec. 31, according to spokes- man Jon Goldstein. Of that, $73 billion was institutional. That's an increase of 17% in total assets from a year earlier, 10.5% in institutional.

The firm had $128.3 billion in AUM ($66.07 billion institutional) at Dec. 31, 2012, and $116.66 billion in AUM ($45.12 institutional) a year earlier.

The combining of the three DC businesses into one giant record keeper could lead to more record-keeper deals, some observers said. “Buying J.P. Morgan's retirement business is a game changer. The industry's been seeing some slow consolidation. This really accelerates that consolidation,” Mr. Meigs said.

Amy Reynolds, a partner and the U.S. defined contribution consulting leader in Mercer LLC's Richmond, Va.-based retirement business and no relation to Robert Reynolds, agreed. “When margins are small, it increases the need for volume,” she said. “If you can't meet margin requirements, it supports the evolution of the market toward these larger conglomerate providers.”

Ms. Reynolds said the merger and following acquisition is “an expansion of (Great-West's) reach with less redundancy than we've seen historically.

“It really expands (Great-West's) reach with a focus on the smaller plans into the large plan marketplace, which is certainly where Putnam has been headed.”

Jeffrey Margolis, a founding partner of the Roslyn Heights N.Y.-based money management consulting firm Margolis/Kass Advisors Inc., said, “It is a bold move, but if you're looking for an area of growth, DC is one of them.

“As long as they can handle the acquisition, I don't think there's a whole lot of risk from a strategic standpoint.”

The ability to make money, according to Mr. Meigs, is the biggest challenge within the record-keeping business. “It's a really low-margin business, and that's. I'm sure. what motivated J.P. Morgan to unload that business,” he said. He noted that in September, Charles Schwab Co., San Francisco, announced it was dropping several 401(k) clients with a combined $24.7 billion of assets because it couldn't make money from record keeping.

When asked why his firm decided to sell its Kansas City, Mo.-based large-plan defined contribution business, Michael Falcon, managing director and head of retirement at J.P. Morgan Asset Management, New York, said: “We loved this (retirement) business and had a huge commitment to it, but it requires substantial investment … both to create efficiency and scale to provide product delivery. And as great as the business is, with 2 million participants, we found ourselves struggling relative to that scale.”