Any fragmented industry that can consolidate eventually will is a concept outlined in the Harvard Business Review article, “The Consolidation Curve.” That theme has played out and will continue to do so in the defined contribution industry, with plan sponsors stepping up and shaping its future.
401(k) and 403(b) plans have several major vendors in their ecosystem, including:
Third-party administrators
Advisors and advisory firms
The first two are dedicated to the DC industry, while the others have divisions that serve the market, though there are groups like RPA aggregators and RPAs within advisory firms that are specialists, which greatly impacts how consolidation will affect them.
The consolidation curve has four distinct stages:
Stage 4: Balance & Alliance
Record keepers are squarely in Stage 3, where the top three to five have over 50% market share focused on mega deals like Empower’s purchase of MassMutual and Prudential’s record-keeping divisions. With thin margins and the focus on profit, marginal firms like OneAmerica and those without sufficient scale or unique distribution, which is most, will suffer targeted by larger providers.
RPAs, aggregators and TPAs are in Stage 2, focused on acquisitions, integration, culture and scalable IT, prioritizing revenue over profits fueled by capital. We will know they enter Stage 3 when mega deals occur.
You can argue that one of the drivers of record keeper consolidation has been tireless specialty RPAs who have pushed prices down and most pretenders out through RFPs. That same phenomenon had been occurring with specialist RPAs feasting initially on blind squirrels with egregious pricing, unwilling or unable to serve as co-fiduciaries. Next are independent RPAs without scale or access to capital and integrated tech stacks unable or unwilling to serve participants.
Though more wealth managers are likely to pay attention to the DC market due to the explosion of smaller plans, most will outsource almost everything to broker/dealer home offices, if they have one, TPAs and investment co-fiduciaries, as well as through pooled plans.
Asset manager consolidation is an entirely different and perhaps touchier subject as many DCIOs struggle to compete with one firm letting go of all wholesalers while the bigger ones, like Fidelity, Vanguard, T Rowe Price, American Funds and Blackrock, double down.
Added to the mix are plan sponsors finally waking up, going from being unconsciously incompetent to consciously incompetent five years ago to consciously competent as retirement plans have become a strategic recruiting and retention tool. Pooled plan providers managing PEPs and many, but not all, larger plans are competent.
Most small to mid-sized plans and even larger ones will never have the resources to hire a dedicated in-house DC professional, so they will continue to rely on their plan advisor or consultant with one big change. They are starting to realize that the most important decision they can make is hiring the right advisor. Their advisor has drilled into them the need to conduct regular investment due diligence and periodic record keeper RFPs, which is how many were hired.
So, as plan sponsors wake up, there will be more focus on advisor due diligence and RFPs, which will result in further consolidation of advisors, just as it did with record keepers. These vetted advisors with scale, tech stacks, marketing and branding capabilities will have greater power as they are closer to the plan sponsors and their employees, able to compete against record keepers for participant services.
So what happens in Stage 4 with a handful of major players focused on alliances and maintaining their positions while exploring new growth opportunities? Higher fees may not happen as ERISA plans are highly regulated and litigated. But there will be less choice with fewer niche providers.
Plan sponsors will continue to gain power either through PEPs or by hiring and managing their RPAs, which should result in better providers, advisors, plans and participant outcomes. The more they are engaged, especially in hiring and managing their advisors and providers, the better the outcomes and the fewer players who can compete effectively.