Companies that once swallowed up DC record keepers and other benefits businesses to diversify, expand and increase shareholder value are now regurgitating them to consolidate — again to increase shareholder value.
The latest example is Aon PLC, which announced Feb. 10 it was selling its record-keeping and other benefits-related businesses to a private equity fund run by Blackstone Group LP, New York. Aon acquired these businesses through its 2010 purchase of Hewitt Associates.
The Aon transaction is the latest example of companies dropping record keeping as they refocus their strategies. Among those conducting sales or spinoffs in recent years were Xerox Corp., Mercer, J.P. Morgan Asset Management, BMO Financial Group, New York Life Insurance Co. and Hartford Financial Services Group.
The activity isn't surprising, defined contribution plan experts said, because record keepers have been besieged by plan executives clamoring for lower fees. Record keeping is a business in which scale is important and where companies must be willing to continue investing in services and technology.
“Sponsors want more tools and services,” said Ross Bremen, a partner at NEPC LLC, the Boston-based investment consulting firm. “Record keepers need to find ways to make the economics work.”
In a survey published in September, NEPC reported that 82% of DC plan executives said they had renegotiated record-keeping fees since 2013. “This may have been a high-margin business in the 1990s, but fees have become compressed in the last decade,” Mr. Bremen said.
“Margins are really tight,” added Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association. “There has been a myopic focus on fees in the retirement space. There needs to be a robust discussion on fees.”
Judging from recent deals, the allure of record keeping is relatively short-lived. Many major players, including Aon and Xerox, that bought and/or expanded record-keeping operations held them for less than 10 years.
DC consultants say the continuing changes in the record-keeping arena shouldn't be a cause for panic. “Sponsors typically avoid knee-jerk reactions,” Mr. Bremen said. “Every situation is different. There are some situations where nothing changes.”