“I told Ed Murphy about this cool, new product idea in the space,” one industry insider recently relayed. “He said, ‘Maybe I should just buy it.’ Because anytime you tell Ed Murphy about a cool idea in the retirement plan space, he says, ‘Maybe I should just buy it.’”
Far from a slam, it’s an acknowledgment that Empower Retirement is well-capitalized and ready to spend (where appropriate).
Indeed, the Denver-based company leapfrogged to the No. 2 recordkeeping position behind some Boston-based firm with the blockbuster acquisition of J.P. Morgan Retirement Plan Services’ large-market business in 2014.
Murphy, who’s been at the Empower helm since 2014 and heavily involved in the J.P. Morgan deal, was named president and CEO of GWL&A—the U.S. subsidiary of Great-West Lifeco Inc. and the parent of Empower—in early 2019.
His earnest, everyman demeanor belies his accomplished business acumen, something that seems to translate to the company’s culture as a whole.
A Massachusetts-to-Colorado transplant, Murphy’s office is adorned with Beantown sports memorabilia, mainly football and notably Doug Flutie-related, as the diminutive, Hail Mary-Heisman quarterback was a classmate of Murphy’s at Boston College.
The wide-ranging discussion, therefore, seamlessly started with Murphy’s impressions of Massachusetts Democrat Representative Richard Neal, and retirement plan legislation currently circling Washington.
Neal, chairman of the House Ways and Means Committee, co-sponsored the “Setting Every Community Up for Retirement Enhancement (SECURE) Act,” which looks to expand retirement plan coverage and overwhelmingly passed in the House with a 417-3 vote.
Empower is well-steeped in retirement plan advocacy, and Murphy has a relationship with Neal, whom he referred to as Richie.
“He’s someone who cares passionately about this issue,” Murphy said. “He knows the space really well. He’s arguably the most astute legislator in retirement issues in Congress. I’d put him right up there with Rob Portman and Ben Cardin in the Senate. So, we’re very supportive of what he’s trying to do in the spirit of expanding the marketplace and addressing those who aren’t covered by workplace savings, and the ever-emerging gig economy with contract workers and such.”
However, he did note the challenge of requiring that small companies offer a retirement plan, something typically met with “fierce opposition” from the Republican Party, given their disdain for mandates.
“That being said, we all agree that people aren’t saving enough for retirement and there is, in fact, a crisis. We know the way that people save is through payroll deductions and workplace saving, so anything that would facilitate and encourage it is something we would embrace.”
Transforming the Retirement System
The company’s recent organizational change, and investments in technology, are in part an effort to better prepare and position itself for the 401(k)-market expansion.
“We are pureplay on defined contribution recordkeeping and not distracted in our focus,” Murphy explained. “The level of support, investment and commitment that we have on the part of our owners and the board is frankly unrivaled relative to the experience I’ve ever had in my career. They see this as a major growth opportunity for the parent company and they see Empower positioned to execute on our vision, which is to transform the retirement system.”
That makes the timing fortuitous—this is without a doubt an industry in flux, driven by the regulation, generational demographics and demise of traditional sources of retirement income.
It’s also a reason scale is so critical, Murphy said, especially now.
“It’s really important to one’s long-term success and the ability to continue to invest in the business. I think the scale players, frankly, are raising the bar for others. At the same time, you have this pressure on admin and investment fees, all of which have benefited the end-user, which is a positive thing. But the cost-to-serve, in many ways, is increasing.”
He uses cybersecurity as an example, an area in which Empower (and many, many others) has made material investments over the past few years with its “security guarantee,” where the firm will make clients whole if funds are lost to a breach.
“What’s interesting is that when we talk with our customers or meeting with prospects, a disproportionate amount of the questions tends to center on this issue of security. We’ve had RFPs with as many as 500 questions pertaining to cybersecurity. So, they’re totally getting it.”
Is it greater awareness on the part of the client, or a legal and fiduciary issue?
“All of the above,” Murphy bluntly stated.
“This is where scale comes in. If I had to spend $9 million dollars improving security and reducing cyber threats, I could spread that $9 million across 9 million participants, at a dollar a participant. If you have to spend the same $9 million and you have 2 million participants, that’s $4.50 per participant, so that’s where scale really makes a material difference.”
Consolidation is Coming
M&A, of course, is also evergreen and ongoing, especially in the intermediary space, which Murphy said is leading to several issues.
“Because you’re going to have less formidable and viable providers and because intermediaries are challenged with performing effective due diligence on a myriad of providers, the business will consolidate to a few players,” he said. “If you’re an advisory firm and you have 150 corporate clients, are you really going to have 150 corporate clients on 32 different platforms, or will it be three platforms? I don’t think that has begun to play out. It certainly has in some advisory shops, but I think fee pressure and the criticality of scale will reinforce the importance of staying power.”
Neglecting to make new investments in its platform is one indication that a provider is preparing to exit the business, Murphy argued, which seemed to reinforce the reason for Empower’s previously mentioned prolific spending patterns, but Murphy took issue with the assertion (somewhat).
“My first obligation, and the team’s first obligation, is to our existing customers,” he emphasized. “We don’t pursue growth for the sake of growth. If it would lead us in a direction where it would compromise our ability to deliver on client expectations and client commitments, we wouldn’t pursue it.”
That said, he won’t pass on smart opportunities, and he used J.P. Morgan as an example.
“That acquisition and the subsequent integration of those clients turned out to be a tremendous benefit for all of our clients. Why? Because it was a catalyst to invest over $100 million in our platform. And that wasn’t there just to serve large clients, but it flowed down-market and benefited a lot of our smaller clients.”
Exclusive Partnerships
As for strategic investments overall, Murphy was more circumspect.
“There are a couple of ways to think about it. One is that we are very much into partnering. We might not want to build it in-house, and we might not feel the need to buy it, so we’ll strike an exclusive relationship, as we recently did with Optum and HSAs,” he said.
Smaller companies have great ideas and are not encumbered by legacy systems, he said, but they don’t have customers.
“I have 9 million of them and 38,000 institutional clients. It’s those two opportunities coming together that can create real value for our clients. So, I’m not sure who told you [about always buying new technology], but I don’t know that it’s fully accurate,” Murphy said with a laugh. “We don’t have to manufacture everything, and we don’t have to administer everything, but we do need to provide a powerful, elegant, actionable and simplistic user experience.”
That user experience is meant to address three core constituencies—the advisor, sponsor and participant—and a discrete set of initiatives and priorities are developed and utilized for each.
“With respect to the advisor, it’s supporting their needs for information and simplicity. The more that we can provide it to them in a way that’s user-friendly and comprehensive so they can better serve both the sponsors and the participants, the better off and the more confident they’re going to be in placing business.”
Advisor-Managed Accounts
The company recently launched advisor managed accounts, which provide participant-level 3(38) services, personalized discretionary investment management, a customer (user) experience, and call center support.
“What we have found through our book of business in discretionary managed account solutions, where there is clearly this conscious choice on the part of the customer to ‘do it for me,’ we’ve been able to look at the results, net of fees. We can compare that to those who work off the fund menu and choose a target-date fund and we can actually see their investing pattern; those that choose to go with a discretionary managed-type solution. Do they tend to invest more? Do they tend to make fewer changes? Are they less emotional?”
Claiming that over 95% of Empower’s sponsors have signed off on the service, it’s the adoption at the participant level that’s challenging, Murphy explained.
“There are a lot of advisors that philosophically believe in this, so in effect we’ve tried to make them part of the solution; to deputize them, if you will, and let them play a role in selecting the models and, more importantly, working with the companies and their employees to raise awareness and drive engagement,” he said.
Despite its stratospheric growth, Murphy said that Empower’s aim isn’t to be the biggest, but the best.
By that, he means their effectiveness in working with plan sponsors to get plan participants prepared for retirement, which he defined as “a point where they’re on track to replace 100% of their pre-retirement income.
Everything we do from a product development standpoint and the partnerships that we might strike with third parties is all centered on that goal.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
