The consensus among DC industry consultants, executives and experts is that record keeper consolidation will continue, driven by rising technology costs, lower fees and increased intellectual capital needed to remain competitive. The prognosis is for fewer providers — which will result in higher fees and worse service.
In a P&I article this month, Callan said that its clients used 40 record keepers in 2006 but just 26 last year. The number of national DC record keepers servicing all markets is now 42, according to NAPA's National 401(k) Record Keepers list. Industry consolidation has sped up in 2014, with six deals already — matching all of 2013. As a result, we’ve just updated our DC Consolidation Report.
The providers which are best positioned are those that can cross-sell other services like proprietary funds, including TDFs, TRFs, stable value and managed accounts. But with greater DOL scrutiny of fees and questions about fiduciary implications of pushing prop funds — as well as the market’s move away from them — it will only get harder for DC record keepers to make money.
Furthermore, if plan sponsors or DOL regulations limit record keepers’ ability to sell rollovers to participants in their plans, look for others to follow Schwab’s lead. In February, the firm threatened to fire $25 billion worth of clients who would not allow them access to plan participants.
One expert predicts that the $25-$100 million market is likely to see significant consolidation pressure, while others believe that insurance companies are best positioned in the small market because of their varied product set. Other firms like Hartford will sell when their senior management no longer views DC record keeping as a strategic priority.
David Musto, CEO of JP Morgan’s large market record keeping group, which is set to be sold to Great-West, said that his company was looking at a 5- to 6-year technology rebuild. In part, he says, that need drove the decision to sell to a firm that had already put together the technology that was needed.
The question on everyone’s mind: Who’s next? All of which makes for nervous industry executives, plan advisors and plan sponsors.
