It might be easy to mistake Empower Retirement's anticipated acquisition of MassMutual's retirement plan business as a straightforward play for scale, but it's more nuanced than that, industry observers say.
The record keeper is looking to grow the number of participants it serves — in industry parlance "build scale" — as much as it's trying to increase the services it offers. The endgame, experts say, is to morph into a bigger, broader-based company that looks more like its nemesis and market leader Fidelity Investments.
The deal certainly adds heft to Empower, a subsidiary of Canadian financial services holding company Great-West Lifeco Inc. The acquisition brings 2.5 million participants in 26,000 workplace retirement plans to Empower's record-keeping platform, bolstering its assets under administration to $834 billion from $632 billion it had as of Sept. 30, 2019, according to Pensions & Investments data. Once the deal closes as expected in the fourth quarter, Empower will have 12.2 million participants in approximately 67,000 plans.
"This transaction consolidates Empower as the second-largest provider in terms of participants and assets," Edmund F. Murphy III, Empower's president and CEO, said during a conference call with analysts. "Not only will this lead to significant scale advantages, but it will allow us to capitalize on expertise, technology excellence and deep product capabilities within the Empower platform."
With an anticipated 12.2 million participants, Empower will be well ahead of Principal Financial Group, which after its acquisition of Wells Fargo's retirement business last July, serves 8.6 million participants, according to Pensions & Investments data as of Sept. 30, 2019. In terms of assets under administration, Empower will widen its lead over TIAA-CREF, which as of Sept. 30, 2019 had $611.4 billion. It also tightens — however slightly — its huge gap with Fidelity, the dominant front-runner with 23.7 million participants and $2.25 trillion in assets as of Sept. 30.
The price that Empower is paying to gain scale and drive down costs is steep. In addition to paying $2.35 billion, which is structured as a reinsurance ceding commission, it is putting up $1 billion of required capital to support the combined business.