But new analysis from global consultancy McKinsey & Co. says previous acquisitions have a “spotty” track record in realizing cost savings through acquisitions.

“We believe there will be continued consolidation in industry,” said Alexander D'Amico, a partner in McKinsey's financial services practice.

That could come in several forms. The strong could get stronger through organic growth, and middle and back-office providers that support recordkeepers could see consolidation.

But more mergers and acquisitions among the 35-plus national recordkeepers, and scores of other regional providers, is also expected.

“From a pure recordkeeping standpoint, there is excess capacity. But that doesn't mean all of these recordkeepers are not making money,” D'Amico told BenefitsPRO.

Notwithstanding the challenges experienced in previous acquisitions, M&A brings the potential to create meaningful value through scale, access to new market segments, and new distribution for proprietary investment products.

But the propensity to miscalculate challenges to integration has hampered acquiring companies.

“The ability to significantly impact cost improvements has been more difficult than presumed,” said D'Amico, co-author of McKinsey's report. Neither he nor the report cites challenges seen in specific deals.

“A number of challenges can be easily underestimated, and solving them can be more complex and expensive that what deal teams might have anticipated,” he added.

Reducing headcount among redundant positions in the merged firms will create natural anxieties, particularly among the acquired firm. That tension can cripple integration. Specific numbers on headcount reductions in previous deals don't necessarily portend what will happen in future deals, said D'Amico.

“In any efficient process, a good acquirer takes a holistic view of both sides of the deal as they develop a new operating model and look to leverage the best in both firms,” he said.

“But it really does vary by deal. When you are acquiring a recordkeeper in the market you are already in, that lends itself to more readily captured cost synergies, more than acquiring a provider in a new market,” added D'Amico.

Then there is the question of spooking the advisors, intermediaries, and plan sponsor clients impacted by the acquisition.

“As soon as a target is out for bid, or even rumored to be up for sale, competitors will attack that target's sponsor and distribution relationships. That happens quickly. This is a market where rumors move early and competitors are quick to pounce.”

In some cases, money managers and other providers put potential acquisition targets on watch lists. From a revenue perspective, that can start to put the acquiring firm in a position of weakness. It's vital for acquiring firms to get ahead of those realities quickly, said D'Amico. Outreach to potentially skittish sponsors and intermediaries needs to begin from the C-Suite of the acquiring firm, and executed at the executive level, Mckinsey's paper says.

The deal between Principal and Wells reportedly included up to $150 million in incentives tied to better-than-expected client retention.

Underestimating the challenge of platform, service consolidation

Administering workplace retirement plans has evolved into an intensively tech-driven proposition.

Consolidating platforms, and the supporting human and IT capital, is as pivotal of a challenge as any in recordkeeper acquisitions.

“It's easy to overestimate the ease of consolidating platforms, which is common in large IT integration across all industries,” said D'Amico. “The downside is not always fully understood.”

With some deals, fully consolidating platforms has proven too difficult, and acquiring firms have had to leave workarounds indefinitely in place.

It's also common for selling firms to stop investing in their platform and supporting infrastructure long before the acquisition, creating more integration issues.

Call centers too have to be integrated. In one option, the merged call center is effectively bifurcated—one portion for incumbent clients, another for acquired clients.

But that too requires investment in training call center employees, and can potentially diminish capacity when spikes in calls occur.

The good news, says D'Amico, is that all of the challenges are solvable.

“But there needs to be complete due diligence in the systems you are acquiring, from the integrity of data to data architecture, and how easily it can be migrated,” he said.

A subtle but consequential shift McKinsey is seeing in the leadership of recordkeeping firms is more talent with a tech background rising to the top. Traditionally, leadership has been cultivated from the distribution side of the business.

“Executives increasingly understand these are tech intensive businesses. With that appreciation, they will pay more attention to the technology and the architecture behind what they are buying than industry has in the past,” said D'Amico.

Challenges in previous acquisitions do not necessarily mean the deals were inaccurately priced.

“Each deal turns on a number of idiosyncratic points,” said D'Amico. “It's hard to say there has been systemic over or under valuing in the relatively small sample of acquisitions that exist.”

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