The financial services industry has witnessed a surge of merger and acquisition activity in recent years. Within the retirement sector, M&A is so rampant primarily because services are becoming more commoditized.
To compete in this marketplace, firms are seeking increased efficiency and scalability, allowing them to offer decreased costs for plan sponsors and participants. Perhaps the most effective way to accomplish these goals is by combining with other firms to create larger organizations.
Additionally, customers are demanding better technology, along with greater convenience and ease of use, especially related to apps and websites. Meeting this demand requires an ever-greater tech investment that can be difficult for small firms to afford.
Meanwhile, many big legacy technologies are old and require significant expense to modernize. So companies industry-wide are asking the question, “If I don’t have the scale to do it, should I sell or potentially outsource?” In the current climate, both options are seeing substantial activity.
Benefits and drawbacks
But is all of this consolidation good for advisors and aspiring retirees? Yes and no. From a positive standpoint, the Department of Labor’s enactment of fee disclosure regulations in 2012 created the competition that has led to this consolidation.
Those regulations represented an encouraging development because many companies had previously been getting away with poor operations and inefficient deliverables. Additionally, consolidation often results in cheaper plans for participants, which is an important consideration.
On the negative side, an ever-smaller number of providers or vendors means fewer choices than before, particularly because the commoditization of offerings has made them look pretty similar across the board. As larger vendors do not typically act as fiduciaries, there also isn’t enough focus on how to effectively drive participant outcomes.
Rather, the emphasis has been on reducing costs while creating colorful and robust websites and apps. But the bottom line is if a participant can’t effectively replace their paycheck when they retire, the system has failed them — regardless of how impressive the technology is or visually appealing their quarterly statements may be.
To actually improve participant outcomes often requires “driving the car” for them. Large, consolidated providers tend to be very good at supplying a car, but the participants frequently don’t know how to drive it.
So if you’re offering great technology at a low cost, it can still be difficult for them to navigate — akin to analyzing a health care plan and trying to figure out what your benefits are. This is because many participants lack fundamental knowledge of investment concepts and terminology.
What can be lost in translation is whether the participant will actually be able to retire with dignity, based on putting away enough money from their paycheck every two weeks. Is anyone really helping them get to that number and enabling them to understand how it should be allocated?
As financial services professionals, we can so easily get lost in industry jargon and forget that many people don’t really grasp what their retirement plan is even investing in, let alone how they should allocate it. Generally speaking, we assume way too much for the average participant.
Keeping priorities straight
So what are the right priorities for consolidation? First and foremost, we recommend abiding by the law that governs all retirement plans in the United States, the Employee Retirement Income Security Act of 1974 (ERISA). Its stated policy is to protect the interests of the participant, so not operating based on that notion means you would almost inevitably be dealing with conflicts of interest and deviating from methods that allow participants to be successful.
The best way to protect the interests of participants is by acting as a fiduciary. But since most large vendors do not do this in any meaningful sense, plan sponsors often step in to fill the void. This can unfortunately be a disaster waiting to happen.
The company’s CEO or CFO acting as plan sponsor and fiduciary is often assuming a role they don’t really understand and are not particularly qualified to fill, while having little idea of the legal liability it entails.
So when consolidation is the goal, we advise firms to seek a match that enables them to benefit from the good aspects while avoiding the bad. This approach entails joining with like-minded companies in the hope of not just expanding profits, but capabilities.
To us, that means focusing on maintaining the spirit of ERISA and a fiduciary culture emphasizing participant outcomes, while accessing a greater pool of talent, skills and services that can aid in technology development.
Good business for all involved
Beyond the benefit to participants of having a company-sponsored plan that will help them retire securely, there’s an operational benefit to the plan sponsor — increased employee retention. According to a survey by Willis Towers Watson, “Attracting and Keeping Employees: The Strategic Value of Employee Benefits,” employees who say their company-sponsored retirement plan meets their needs are more likely to continue working for the company until they retire.
On the flip side, specifically with younger employees, if their retirement plan does not meet their needs, they are more than twice as likely to leave the company within the next two years.
The simple truth is that participant success represents good business not only for the participant, but also the provider, advisor, and employer, providing a fundamentally positive impact on society.
Dr. Gregory Kasten was the Founder and Chief Executive Officer of Unified Trust Company, which was acquired by American Trust Company, a subsidiary of EdgeCo Holdings.
John Moody is Chief Executive Officer of EdgeCo Holdings.
