Fewer recordkeeping options will provide plan sponsors with more services and technology, but it may come at a higher cost in the long run.
A 401(k) History Lesson
The recordkeeping industry has evolved since the early 1980s. When Ted Benna, the father of the 401(k), received IRS approval for the first salary deferral plan under section 401(k) in 1982, there was no master plan for the industry. Consulting firms drove the popularity of 401(k) plans as supplemental plans to their existing pension plans to provide employees with additional retirement savings options and executives with a legal tax dodge. Recordkeeping essentially required only quarterly paper statements, and there was no participant-directed investing.
The next step in the evolution of 401(k) plans was driven by the mutual fund industry in the early 1990s. Recognizing a massive opportunity to capture assets, the mutual fund industry convinced Americans that they should control the investments of their retirement accounts. Once individual participants were making the investment decisions, the demand for more frequent information and access naturally developed into daily recordkeeping and 24/7 access.
The most dominant recordkeepers in that era were the mutual fund companies and insurance companies whose primary interests were to sell their investment products. So the American retirement landscape was more of a vehicle to corporate profits than a well-considered program to provide retirement-ready participants.
In the early 2000s, the emergence of independent retirement consultants and investment advisors to the 401(k) market began to change the industry slowly by promoting more fee awareness and began to wrestle control of the investments away from the investment providers’ proprietary products. The goal was fee transparency and investment “open architecture.” Open architecture is the ability to use investments provided by more than a single fund family or insurance company. Originally, only the largest companies could afford such luxuries, but over time, open architecture became the norm.
Most participants still did not understand the costs associated with either their 401(k) plans or the mutual funds that they bought within them. When 401(k) plans came under pressure due to excessive fees and subpar performance, our government stepped in to correct the problem with more regulation and disclosure requirements geared toward educating participants in these areas. All of this brings us to where the retirement industry is today: a hodgepodge of evolutionary mutations for good and bad, pieced together by industry demand and governmental reactionary oversight. As such, it should come as no surprise that recordkeeping firms would continually enter and exit the business. When there appears to be an opportunity to generate profits, various entities decide to take advantage and find a way to offer recordkeeping services. Once regulation or client demand stretches those profit margins too thin, they outsource, sell, merge or simply exit the business to concentrate resources on other priorities.
Over the past three years, the rate of consolidation in the recordkeeping business has been very aggressive. The most notable acquisitions are:
- Empower – rebranding of Great West after the acquisition of JPMorgan and Putnam recordkeeping services
- Transamerica – acquired Diversified Investment Advisors and Mercer recordkeeping services
- John Hancock – bought New York Life Retirement Plan Services
- MassMutual – acquired The Hartford’s retirement plan business
And these are just the most newsworthy of the flurry of acquisitions. Other buyers include One America (acquired BMO) and CUNA Mutual (bought CPI), as well as many other smaller deals. All of this activity has resulted in fewer providers controlling a much larger portion of the overall market. It is estimated that 85 to 90 percent of all plans, participants and assets in defined-contribution plans are concentrated with the top 20 providers.
There are many reasons to buy or merge with another recordkeeper; most successor firms are looking for market share or access to market segments where they are not strong. Acquiring a competitor’s superior technology or systems is also a common goal. Regardless of the reason, many plans now use a different recordkeeper than the one they chose five years ago through no choice of their own.