Record-kept assets surge; competition for growth heats up

Propelled by a strong stock market, defined contribution record keepers enjoyed a robust increase in assets under administration last year, disguising, however, slow growth in participants' accounts and even slower growth in the number of DC clients.

Aggregate assets rose to $9.7 trillion as of Sept. 30, up 18.2% from the previous 12-month period, while the number of participant accounts were up 4.1% to 109.1 million, according to the latest annual survey by Pensions & Investments. The number of sponsor clients rose only 0.9% to 686,062.

DC consultants and researchers say that an industry buffeted by thin profit margins, a greater demand by clients to reduce fees and receive more services, as well as a need for more technology investing, is reaching a point where record keepers and/or their corporate parents must decide whether to spend the extra money, get out or adjust their business models.

"The fastest way to grow is through acquisition," said William Ryan, Chicago-based partner and head of defined contribution plan solutions at NEPC LLC.

One frustration for record keepers seeking new clients — even in good times — is the process for a sponsor's RFP. Many sponsors put their record-keeping requests up for bid every three to five years, Mr. Ryan said. It takes a sponsor's investment/administrative committee three to six months to prepare an RFP. If the RFP results in a change in record keepers, it can take another 180 days to complete the switch, he said.

"There is a saturation point" for record keepers gaining business in DC markets with sponsors having $100 million or more in assets, said Robyn Credico, the Las Vegas-based defined contribution consulting leader for Willis Towers Watson PLC.

For record keepers on the prowl for new clients in these markets, sponsor process is likely to cause them anxiety. "You have to be doing something really horrible for a sponsor to move" to a new record keeper, she said. Among her clients, she has seen more fee and benchmarking RFPs but "about the same" each year for the number of searches for new record keepers. She doesn't expect the search volume to increase.

DC expert Lew Minsky is a bit more optimistic, noting that the coronavirus pandemic affected record keepers' efforts to grow organically. Plan sponsor conversions and RFP searches have been "slower than in normal times," said Mr. Minsky, the Palm Beach Gardens, Fla.-based president and CEO of the Defined Contribution Institutional Investment Association. "I haven't seen any quantitative data on potential RFP activity but suspect it will come back slowly at first and return to normal over time."

A common theme of the RFPs is that record keepers will continue to experience "ongoing pressure to cut costs, add functionality and improve service levels," he added.

The question for some traditional record keepers is which model produces growth. "The mega and micro markets are different, and some may choose to focus on one or the other," he said. "Some may develop models to service both — and the full continuum in between — in order to broaden and diversify their business opportunities."

Some traditional record keepers have made forays into the small-plan market. Vanguard Group Inc., Malvern, Pa., has a separate record-keeping program, Vanguard Retirement Plan Access, that serves plans with less than $50 million in DC assets. Fidelity has a year-old pooled employer plan program, called Fidelity Advantage 401k), which has nearly 200 businesses — with five to 50 employees — that didn't offer a retirement plan, a spokesman wrote in an email. Capital Group Cos. Inc., Los Angeles, which isn't a traditional record keeper, provides record-keeping services for approximately 63,000 DC plans each with assets under $10 million, a spokeswoman wrote in an email.

"The development of PEPs is a product that allows record keepers to provide a scalable solution to smaller plans including startup plans," said Mr. Ryan of NEPC. "Startup plans are the next frontier for record keepers to grow because they can be signed up much faster than an established plan."

For traditional record keepers accustomed to dealing with larger clients, entering the smaller-plan market presents challenges in philosophy and strategy, said Shawn O'Brien, the Boston-based associate director of retirement at Cerulli Associates.

He cited the hypothetical example of a big-plan record keeper trying to compare the value of having one DC client with $1 billion in assets vs. seeking 1,000 clients each with $1 million in assets. For the former, "it's easier and more efficient," he said.

"There's a different type of competition in the small market," Mr. O'Brien said, adding that the prospects of pooled employer plans and multiple employer plans offer opportunities.

However, record keeping in the small market requires a different approach. Big-market record keepers may try to distinguish themselves by offering wellness programs, or managed accounts and/or enhanced customer relationship services, but for the small-plan market, "it's all about efficiency and delivering at scale in a technologically efficient manner," Mr. O'Brien said.

For companies catering to larger DC sponsors, Mr. O'Brien added, the value is not only for the record-keeping business but also for potentially providing other services and products.

The latest P&I survey contains results provided voluntarily by record keepers mainly with an emphasis providing services to larger DC plans — led by Fidelity Investments, Empower Retirement and TIAA-CREF. Of the 30 companies that responded to the survey, 29 had higher assets over the 12 months ended Sept. 30.

Aggregate cumulative results for the five years ended Sept. 30 showed the same trends in growth rates as the 12-month figures. Assets under administration rose 77.4% over the period, while the number of participant accounts rose 25.9% and the number of sponsor clients gained only 1.3%.

Some survey respondents have extensive small-market experience, including ADP Inc. (average plan size: 29 participants) and Paychex Inc. (average plan size: 13 participants). However, the traditional record keepers also must decide if they want to — or are able to — compete with an assortment of digital plan providers such as Vestwell, Ubiquity, Betterment for Business, Human Interest, SaveDay Inc. and Guideline for small individual plans or pools of small plans.

Even as some traditional record keepers contemplate new markets, they also must protect their flanks in existing markets. Recent research by Callan LLC found that 16% of DC sponsors said they would "very likely" in 2022 renegotiate the service agreement with their record keeper while 23% said it was "somewhat likely" they would renegotiate. Another 16% said they would "very likely" renegotiate record-keeping fees, and 23% said it was "somewhat likely" they would do so. Multiple answers were allowed for the survey, published in February, of 101 large-plan sponsors for the 2021 calendar year covering Callan clients and non-clients.

"There is an opportunity to negotiate lower fees even in this environment," said Jana Steele, Callan's Chicago-based senior vice president and defined contribution consultant.

The survey also noted that 24% of respondents said they were "very likely" or "somewhat likely" to conduct a record-keeper search in 2022. In the previous year's survey covering 2020, Callan reported that 14% said they were "very likely" or "somewhat likely" to conduct a search in 2021.

Ms. Steele added that large-plan record keepers are becoming "more uniform" in their services and practices due to industry consolidation.

The pressure by sponsors to reduce fees coincides with the record keepers' need to increase technology spending as they look to increase efficiency, provide more services to participants and guard against cyberattacks, NEPC's Mr. Ryan and other sources said.

"Those who are investing in technology are making a long-term bet for survival," Mr. Ryan said, adding that the industry is closely watching Vanguard and T. Rowe Price — both of which hired outside firms to handle their record-keeping technology.

In May 2021, T. Rowe Price said it would outsource its retirement technology and core operations effective Aug. 1 to Fidelity National Information Services, which has provided the company's record-keeping technology platform for 30 years.

T. Rowe Price said FIS' technology expertise would help the company modernize record keeping, provide additional retirement income options, offer new digital payment services, and add financial wellness services and products. Some 800 T. Rowe Price employees, or about 10% of the workforce, were offered the same technology and operations roles with FIS as they had with T. Rowe Price.

With $268.3 billion in AUA as of Sept. 30, T. Rowe Price placed 10th on the P&I record-keeper asset list, up 22.4% for the year.

In July 2020, Vanguard announced the transfer of its record-keeping technology operations to India's Infosys to handle the software platforms, administration and associated processes of Vanguard's record-keeping business. Vanguard said this strategy would help reduce costs and improve technological capabilities, adding that 1,300 employees would take comparable jobs at Infosys.

With AUA of $701.6 billion as of Sept. 30, Vanguard placed fourth on the list, up 18.4% for the year.

"It will be interesting to see if that model will make them compete more efficiently," Mr. Ryan said, adding that it will take several years for the companies to assess how well the strategies worked.

"I think they need five years" to determine the impact of outsourcing the technology requirements, Callan's Ms. Steele said.

"It's a very difficult decision to pay for an increase in technology and make a profit," said Toni Brown, San Francisco-based senior vice president and head of retirement strategies for Capital Group she said. "You don't want to be a loss leader."

Ms. Brown said another challenge to record keepers is how their clients deal with retirees during the so-called Great Resignation. Although participants are leaving their employers, that doesn't necessarily mean they are taking their retirement accounts with them as "more sponsors try to keep people in the plan" upon retirement, she said. Ms. Brown said the entrance of new employees vs. the departure of retirees combined with the plans' retention of retirees' assets "appears to be a wash."