As the defined contribution industry's record-keeping consolidation continues with big-name deals, DC industry experts say there's more to come due to narrow profit margins, increased technology requirements and greater sponsor demands.
Last month, for example, Empower Retirement bought the record-keeping businesses of Massachusetts Mutual Life Insurance Co. and Fifth Third Bank, further cementing its role as the second-largest U.S. record keeper by assets, according to annual surveys by Pensions & Investments.
Empower, Greenwood Village, Colo., was created in 2014 by combining the record-keeping businesses of Putnam Investments and Great-West Financial, and the acquisition of the large plan DC business of J.P. Morgan Asset Management.
Last year, Principal Financial Group, Des Moines, Iowa, acquired the record-keeping business of Wells Fargo & Co. — and DC consultants expect more to come.
"It's a scale business," said Robyn Credico, the Las Vegas-based defined contribution consulting leader for Willis Towers Watson PLC. "It's more successful to acquire a book of business than to try to grow the book of business."
Consultants add that there's a good chance insurance companies — like Principal — or subsidiaries of insurance companies — Empower is owned by Great-West Life Co. — will be active players in consolidation.
Insurers are attracted to record keeping because they can use the business to cross-sell products, DC consultants said. "Record keeping may not be profitable but there's ancillary revenue" from insurance products, stable value and other products, said Jana Steele, a Chicago-based senior vice president and defined contribution consultant for Callan LLC.
"Insurance-based providers have been historically in smaller to midsized markets," said Martin Schmidt, a DC plan consultant and principal at MAS Advisors, Chicago. Their acquisitions help them build "greater scale and opportunities."
Aside from the insurance-product angle, record-keeping consolidation has proceeded due to changes in the DC industry as well as by corporate parents that no longer view record keeping as part of their strategic plans. Those are strong reasons why record-keeping businesses run by Mercer, Hartford Financial Group, New York Life Insurance Co. and Bank of Montreal — just to name a few — were sold during the past 10 years.
"The industry has become one of increasing complexity," said David Levine, a Washington-based principal at Groom Law Group who represents DC industry members. At the same time, aggregate record-keeping fees continue to decline — despite consolidation — requiring firms to "do more with less," he said. "You can't expect to get everything for free. You can go just so low before services are affected."
Vulnerable record keepers are those "who have not been investing in their technology," Ms. Steele said. "They have to decide what is their appetite for change."
The industry's buyers have "very robust technology systems," said Leslie Smith, a Somerset, N.J.-based partner for Aon PLC, noting such features as improved web services and mobile applications.
The technology demands have increased as the risk of cybersecurity increases, Ms. Smith said. In the past, record keepers had to improve technology to provide new services; now there's a greater emphasis on protecting participants.
"There is a huge risk and a huge expense," she said. "This is more mitigating risk – not adding to what you can offer."
The importance of technology was underscored when Vanguard Group Inc., Malvern, Pa., announced in July that it would outsource its record-keeping technology operations to Infosys Ltd. of India.
Under the partnership, Infosys will be responsible for software platforms, administration and other processes for Vanguard's record-keeping business. Also, 1,300 Vanguard employees — including Martha King, head of Vanguard's institutional investor group — will join Infosys.
"That was a defining event," said Mr. Schmidt, adding that it was too early to gauge if any Vanguard peers would follow.
Record keepers must decide if they want to keep their core record-keeping function or outsource it, Mr. Levine added. "For some it might be a great fit," he said. "For some, it may not."