Another factor in consolidation is whether a corporate parent believes record keeping is a strategic component for the future. “Even if organizations find ways to execute profitably, they still have to contend with shifting priorities of top-level management,” said Mr. Bremen, declining to discuss specific cases.
In 2012, for example, Hartford Financial Services Group hung a “for sale” sign on its record-keeping and several other businesses because they no longer figured in the company's long-term strategy. The Hartford DC business was acquired by Massachusetts Mutual Life Insurance Co., Springfield, Mass., in January 2013.
A general formula for survival includes the ability to use record keeping as a way of generating more revenue through the sale of other products and services, said Martin Schmidt, principal and client services director at HS2 Solutions Inc., Chicago, a retirement plan and technology consulting firm.
He cited as examples Fidelity Investments for proprietary asset management; Prudential Financial Inc. for retirement income; and Aon Hewitt for offering online advice and managed accounts from Financial Engines Inc.
Record keepers also benefit from having a strong individual retirement account rollover business. “Fidelity is widely known to have the top rollover capture ratio in the industry,” said Mike Alfred, CEO and co-founder of BrightScope Inc., San Diego, which provides retirement plan ratings to participants, DC plans, asset managers and advisers.
Mr. Alfred said record keepers most likely to be acquired or merged are those that haven't been able to sufficiently exploit their bundled services and products or those that “don't have a strong asset management franchise.” Companies that can't differentiate their record keeping technology from those of competitors also could be vulnerable, he said.
A prime market for consolidation is among record keepers serving DC plans with $25 million to $100 million in assets, said Drew Carrington, senior vice president and head of defined contribution — institutional for Franklin Templeton Investments, San Mateo, Calif. His firm isn't a record keeper.
“In this market, companies are transitioning from small to larger,” requiring more sophisticated administration of investments and benefits, Mr. Carrington said of potential DC clients for record keepers.
The ability to sell ancillary products suggests to some DC consultants that insurance companies might have an advantage — especially in the small and midsize DC plan markets — thanks to the multiple products they can sell to DC plan participants and sponsors.
“For the next consolidation, a record keeper will more likely be bought by an insurance company than a traditional asset manager,” said Christopher Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, Conn. “Some insurers could be natural acquirers.”
Mr. Lyon didn't cite any candidates, but he noted that insurers could have an advantage thanks to their focus on annuities as well as their efforts to develop retirement income products.
“Insurance companies look at record keeping as an entry to getting a captive audience,” said Jacob O'Shaughnessy, adviser at Arnerich Massena Inc., Portland, Ore. “Maybe they can offer wraps and stable value. Maybe they can offer annuities.”
He added that insurance companies “have done a decent job of leveraging their record-keeping relationships into achieving other revenue streams.” As examples, Mr. O'Shaughnessy mentioned Prudential Financial, Nationwide Mutual Insurance Co., Voya Financial Inc. and Great-West. He declined to speculate on possible buyers or sellers among record keepers.
Insurance company executives aren't shy about promoting what they say are their advantages.
“We are uniquely positioned to provide other protection products” such as annuities, disability insurance and life insurance, said Elaine Sarsynski, executive vice president of MassMutual's retirement services and worksite insurance division, and chairwoman of MassMutual International. “MassMutual and others are positioned to have asset management arms. We have multiple ways to impact employers and participants.”