Recordkeeping is necessary for defined contribution (DC) plans. But media reports and commentary sometimes call recordkeeping a “commodity” because the service is common and recordkeepers are “a dime-a-dozen”, and they talk about how recordkeepers’ business margins are thin. Consolidation in the industry has continued at a steady pace.
Robyn Credico, defined contribution consulting leader, North America, Willis Towers Watson, says she wouldn’t agree that recordkeeping is a commodity because “recordkeepers work hard to differentiate themselves in different markets.”
Fees continue to be compressed, but companies have to continue to compete with technology and other services, so costs are up and revenues are down, Credico says. Another reason revenues are falling for recordkeepers is that fewer plan sponsors are opting for bundled recordkeeping solutions, so chances for leveraging other parts of their business have decreased, she adds.
Pamela A. Popp, president of Lockton Retirement Services, says the fundamental recordkeeping function—what she calls the basic blocking and tackling—is what is considered the commodity. “Things are different now from 20 years ago. Back then, the data center and quality, or lack of errors, in recordkeeping were the differentiators,” she says. “And, while that still needs to be considered, that is now not what drives value. Recordkeepers must now focus on the value add.”
Pricing has been driven down for recordkeeping functions, and the value add services needed for recordkeepers to differentiate themselves require significant investment, Popp says. “Recordkeepers consolidate for scale and growth,” she says.
Consolidation May Be a Good Thing
While it may be a little unsettling for plan sponsors and participants whose recordkeepers are merged with or acquired by other ones, Popp says she believes consolidation is better for them because the “surviving” recordkeeper is the one most invested in technology. Plan sponsors can partner with their advisers to hold the new recordkeeper accountable for pricing consistent with service quality. “Plan sponsors being merged can lean on advisers to help them get through the transition and help them understand the benefits. Sponsors will likely find they have more tools at their disposal, not fewer,” she adds.
Credico says, typically, when recordkeepers consolidate, they are trying to maintain the best of both companies. For the clients of an acquired company, there will be change. “Plan sponsor clients of the acquired recordkeeper need to do their due diligence on the new recordkeeper and need to be OK with the changes,” she says. “The fiduciary duty of the selection of providers means do your due diligence and don’t just go along with the change.”
Credico adds that, with an acquisition, the acquiring company will usually maintain plan sponsors’ contracts up to the duration of the contract. “But it’s important to benchmark fees, which may go up or down after that,” she says.
How to Differentiate With a Smaller Pool of Choices
As the pool of recordkeepers gets smaller, plan sponsors might have a harder time differentiating between them. What should plan sponsors want to pay for?
Credico says, at a minimum, plan sponsors want recordkeepers with accurate processes so that every participant record is correct. And recordkeepers should be continually looking to bring solutions for participants’ needs.
“Plan sponsors should also want a provider that keeps their plans up with the times,” Credico says. “They don’t have to be the leader, but should bring plan sponsors new ideas and trends.”
Sponsors also want a team that will focus on sponsor needs and offer solutions for them. “They want to look for a recordkeeper that does a fair amount of business with plans like yours and of the same size.”
Participant communications and customized solutions may be important, Credico adds. “If the plan uses all automatic features, perhaps communications are less important versus trying to engage participants and encourage change,” she explains.
Investment in technology is a differentiator for recordkeepers, Credico says. “More participants tend to go to the internet for services, so recordkeepers should be improving websites and making them user-friendly,” she says.
Popp says firms that lead the pack are the ones that are most invested in quality technology and cybersecurity.
In addition, Credico notes, there’s a big market for financial wellness solutions, and products integrated with technology are important.
“Primarily, plan sponsors should want to pay for value add services for participants,” Popp says. She explains that this includes tools that help participants understand their financial picture, solve for it and improve it for the future. “Student loan benefits, managed accounts and advice that incorporates participants’ total financial picture are examples of tools that address individual challenges, not just saving for retirement,” she says. “Recordkeepers that focus on these are the ones that will differentiate themselves.”
If a plan sponsor finds two recordkeepers that seem alike from other perspectives, it should look at teams or people as the differentiator, Credico says. “Make sure the staff have the right experience and knowledge.”
Credico says she doesn’t foresee consolidation continuing between the very largest recordkeepers, but they might continue to acquire smaller recordkeepers. “It’s difficult to make money in recordkeeping, but there’s a better chance if you have scale,” she says.
Likewise, Popp says she thinks smaller recordkeepers will continue to be merged into larger ones and “ultimately, the industry will end up with a couple of handfuls of recordkeepers with significant scale and a focus on participant value add services. To me, this is a standard life cycle of the industry, and, as it matures, we’ll see more consolidation.”
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