Recordkeeping Consolidation: What Should a Plan Sponsor Do?

shutterstock_1107094493_consolidationIn my last blog post, I discussed retirement plan recordkeeping consolidation and the market dynamics driving consolidation. Assuming that I am correct, that the market is likely to see continuing, and potentially accelerating consolidation of recordkeepers, what should a plan sponsor do?

For all plan sponsors, I believe they need to understand the market dynamics and the potential impacts on them. For most plan sponsors this can be challenging, and they should be looking to their retirement plan consultant to provide education and context. Plan fiduciaries should understand where their recordkeeping vendor sits in the competitive landscape and how that position may impact their business. Are they with a small, niche provider, a mid-tier recordkeeper trying to compete with the largest providers, or are they with an industry leader? I don’t believe one type of provider is categorically better than the others, but plan fiduciaries should understand the answer and decide if their vendor’s market position matches their needs.

In addition to understanding their vendor’s market position, plan fiduciaries should understand their recordkeeper’s business model. As discussed in my prior blog, most recordkeepers are trying to monetize their recordkeeping relationships by selling higher margin services either in the plan or using the participant data and relationships to sell additional financial services outside of the plan. My colleague, Erik Daley, has written extensively on this topic. Again, there is not a “right” answer to the business model, but plan fiduciaries should understand it and decide whether it aligns with their values and goals.

For many plan fiduciaries, consolidation is a market dynamic that they should be aware of, but it has not directly impacted them yet because they are not with a vendor involved in consolidation. If you are directly impacted by a transaction, what should you do?

My answer depends. In considering this question, I think most people focus on the plan sponsors of the acquired firm. They are going to face the greatest impact of any change in vendors. At the same time, in my experience, the acquisitions also have an impact on the acquirer’s clients.

In answering this question, I think it is helpful to look back on the understanding of industry dynamics that was discussed in my previous blog post. Acquisitions are primarily about either achieving economies of scale for the acquiring firm or a belief that the acquired client base may be further monetized by selling them additional products and services. To do this, they need to eventually consolidate their technology stack and service model. As a result, plan fiduciaries should understand that they are going to go through vendor conversion at some point, whether they want to or not. Frequently when a transaction is announced both companies will try to downplay the impact, it has on affected clients. They may not know a timeline for consolidating systems, or they may decide to initially operate the business separately to avoid any immediate impact. At some point, they will need to make the decision to consolidate in order for the acquisition to make sense. They will try to minimize the impact on clients, but it will require changes.

For clients of the acquired firm, knowing that they will have to go through a conversion, I encourage them to conduct a vendor search project. By taking the lead in evaluating their vendor, they can decide on the objectives for their plan, their needs from their service provider, and whether the acquiring firm is the best fit. If the acquirer is the right fit, great, they can move over proactively or decide to move to the new solution when the consolidation occurs. If not, the plan fiduciary can select a vendor that fits their needs and proactively make the transition to the new service provider. This avoids the interim step of having to consolidate to the new provider, deciding that it is not the right fit, and then having to go through another change to a different provider. A vendor search process will enable you to take control and make a decision that is best for you, not for your vendor.

If your recordkeeping vendor is the acquirer, you should understand that you are not completely off the hook. In my experience, these clients are also significantly affected by an acquisition. The reason why depends on the reason for the acquisition. In some cases, the acquirer is using the acquisition to acquire new technology capabilities. In this case, you may be the plan that is forced to go through a conversion. Clients with Wells Fargo in 2008 and 2009 were eventually transitioned to a new proprietary recordkeeping system acquired from Wachovia.  Even if it does not require a system conversion, your plan sponsor and participant experiences may change and should require your evaluation.

Aside from the potential impacts of combining technology stacks, there is the business impact that an acquisition has on a company. An acquisition of any meaningful size can be a distraction for the acquirer as it requires their leadership and staff to devote a significant amount of time to the consolidation project. In my experience, this can either lead to staff burnout and increased turnover, or stalled development. In either case, existing clients feel the impact.

Not all acquisitions are necessarily negative for the clients involved. In many cases, it can lead to enhanced capabilities and services. However, an acquisition creates risks that plan fiduciaries need to monitor. The greatest risks are for those plan sponsors that have kept their vendor relationship on auto-pilot. If you are proactively monitoring your vendors, educating yourself on the market, and making decisions about your service provider, you are well-positioned to navigate the changing market. If you would like help evaluating your recordkeeping vendor, please reach out to a Multnomah Group consultant.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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