Consolidation boom: An inside look at how consolidation will shape the future of the retirement plan industry
For benefits professionals, it’s important to understand the driving forces and implications — as well as potential benefits — of industry consolidation.
The financial services space has witnessed an explosion in M&A activity over the last decade, drastically reshaping the industry and the way in which companies are able to compete and do business. In 2019 alone, there were more than 200 RIA deals and over 650 wirehouse breakaways.
This wave of consolidation has also been seeping into the recordkeeping space. Since 2008, the rate of M&A activity in the retirement plan industry has been extensive and there are a few key indicators driving companies to consider partnerships.
These deals have a ripple effect on plans and plan sponsors of all sizes. For benefits professionals, it’s important to understand the driving forces and implications — as well as potential benefits — of industry consolidation and how it might impact you.
Key indicators fueling consolidation
Retirement industry consolidation really comes down to profitability and earnings, prioritization of resources and investment in people, technology and product development. If organizations want to succeed in the current environment and well into the future, it’s imperative that they examine their relative success in these areas. If any of them are faltering, they may need to align with another firm that can fortify their offerings in particular areas.
In evaluating their ability to succeed, companies must first take a closer look at what is truly driving profitability. Typically, for some of the top companies in the space, recordkeeping and retirement plan administration are not core to their earnings. Other areas such as asset management, life insurance or other consumer-driven products tend to be driving the most profit. As a result, we have seen major companies like MassMutual and Hartford Life join with other firms to exit the retirement business altogether.
On the flip side, smaller-scale companies rely on their retirement plan business to stay afloat. Many are asking: “Do we have enough scale to be profitable and are we investing at the right level in people, technology and product development to be relevant five to 10 years from now?”
When speaking with organizations on the frontlines, we’ve noticed they are primarily worried about their ability to keep up, but also incredibly concerned about the growing threat of cybersecurity and fraud. Family-run businesses, which often have their personal net worth wrapped up in the capital of their enterprise, are likely one significant lawsuit away from being insolvent. That’s a very big concern when coupled with the aging demographic of the retirement plan industry and the principals who own those firms.
What it really takes for your recordkeeper to compete for your business
Once companies have identified whether their work in the retirement space is truly core to what they do and their ability to be profitable, they need to determine whether they are well positioned to compete at the next level.
As the industry evolves, we are seeing a tremendous focus on personalization, advice and integrated technology to make it easier for participants and plan sponsors to do business with companies.
Many businesses may be wondering if they have enough scale to deliver on these features. There is a myth in the retirement industry that scale boils down to the number of participants you have. When you look at any given statistic regarding what constitutes critical scale to be relevant in the retirement business, it’s completely subjective across the 160-plus recordkeepers in the industry. Each has a different cost structure, a different revenue structure and a different margin structure. Scale is truly about having the sustained profitability to reinvest in technology, security infrastructure, people and product development — those are the aspects that will continue to make a company relevant.
Is there a recipe for successful M&A?
As companies begin to explore options for consolidation, what are the differentiators to success? Companies that benefit from these types of partnerships are usually prioritizing the same things:
1. Strategic fit: In order for an acquisition to be successful, not only for the companies that are aligning, but for the advisor and end participant, the deal can’t just be a scale play. It’s one thing to do an acquisition, but another to find a strategic fit, which starts with the culture of the people and how much synergy can be created as two companies come together.
2. Integration: We see some deals fail in the integration phase, which trickles down to the ability to truly serve the client in the most strategic way. Successful M&A involves a smooth transition and integration of the acquired business. Corporate ego can often get in the way of making key decisions and streamlining this transition.
3. The advisor and participant: A company’s primary focus should be on how this is going to impact the client. Oftentimes, decisions are made for the company over the client and that’s when issues arise. Regardless of how great the deal looks on paper, it has ultimately failed if the consumer doesn’t benefit.
4. Not just transactional: Companies that forge successful partnerships that truly benefit their customers are not just making a transaction. They are looking for a partner who doesn’t just want to sell their business, take the pay check and exit stage left, but rather one whose passion for the business shines through.
As we look across the industry, there is a wide range of successes and challenges. So many conversations start with scale in mind and, as a result, we often see fallout 30 days, 60 days or even a year after an acquisition takes place.
Above all, this is a people business; it’s not a manufacturing business. The client-service aspect of helping people create better retirement outcomes is not only reliant on cutting-edge technology, but it really starts and stops with having the right person pick up the phone when a client calls and give expert advice related to a corporate retirement plan. We believe people are the single greatest asset when it comes to retirement plans and they make all the difference in the world.
The future is bright
Looking ahead to retirement plans five years from now, after even greater consolidation happens, retirement offerings through any recordkeeper will likely be much broader platforms, which would benefit both the advisor and participant.
Remember the old ING ad campaign, “What’s your number?” It was on seemingly every orange bench across America, prompting retirement savers to figure out how much money they needed for retirement. That concept has evolved quite a bit over the last several years. Down the line, retirement plans will help savers with more than just replacing their paychecks. There is significant innovation percolating when it comes to offering holistic retirement platforms that provide additional support like financial wellness.
Five years from now, the top retirement providers will likely be focused on a much broader view of how we can add value to a participant’s financial wellness and financial literacy, while making it easy to have a much more aggregated view of their financial picture.
As an industry, we are headed in the right direction. Collectively, we are stronger when we surround ourselves with like-minded individuals who are wildly passionate about creating better retirement outcomes for American workers.
Organizations are realizing this and taking advantage of it, which is why M&A activity is booming. If businesses approach acquisitions with the best interests of advisors and participants at the center, then all parties involved will largely benefit.
