According to Renee Schaaf, president of retirement and income solutions at Principal Financial Group, the main message to take away from Principal’s newly announced acquisition of Wells Fargo’s institutional retirement and trust business is that the combined entity is fully committed to the retirement plan recordkeeping space—and for the long-term.
“This is really about our future as an organization and how we think about our marketplace and our clients,” Schaaf tells PLANSPONSOR. “When we look at the retirement plan industry, we know that we have a deep commitment to this space. In fact, retirement is at the core of what Principal is and stands for. So much of our revenue and assets under management today are retirement related.”
Schaaf agrees this acquisition fits squarely into the ongoing industry conversation around recordkeeper consolidation. On her analysis, consolidation has steadily hummed along in recent years and it will only accelerate moving forward.
“There are still a number of sub-scale players out there, and we know that the sheer economics of this business makes it very difficult for smaller players to remain competitive on the services they offer and the prices they need to charge to break even, let alone create a reasonable return,” Schaaf says.
In this respect, it will be interesting in the coming months to see if any providers that had seriously considered acquiring Wells Fargo’s retirement business could now turn their attention to others. When it comes to Principal’s choice to acquire Wells Fargo’s retirement business at this juncture, Schaaf adds that Wells Fargo has a nice footprint in the mid-sized market, while Principal has always been focused on the small- and mid-sized market.
“So, we feel that we can fit the organizations closely together and ultimately strengthen our mid-market focus,” Schaaf says. “We expect the economies of scale this acquisition delivers will allow us to invest more in the long-term and to retain our commitment to servicing plan sponsors and participants.”
According to Schaaf, the executive leadership team will be looking to strategically combine the best elements of both businesses. As an example, she points to Wells Fargo’s client service platform, which offers advanced plan health analysis and reporting capabilities, as well as participant on-boarding and education capabilities. On the flip side, Principal brings to the table expertise in the area of guaranteed income solutions, pension risk transfers, robust asset management capabilities and a high degree of automation.
“Additionally, we’re very excited about the talent and the employees that serve the Wells Fargo business,” Schaaf says. “We feel there is a real compatibility around the way we view the customer service challenge and the need to serve customers effectively.”
In terms of the recordkeeping platforms and technology the combined firm will rely on moving forward, Schaaf says this is “an exciting and evolving area.”
“Both Principal and Wells Fargo have proprietary recordkeeping platforms from an IT perspective,” she notes. “One of the things that we must do and now we can begin doing in earnest is to work very closely with the Wells Fargo team to identify what are the capabilities and what is the functionality of their IT platforms and systems—and then comparing this to ours, with the intent of bringing the best of both to the marketplace. How we do this is going to be a big part of the work that we get into right away.”
Schaaf adds that the nonqualified deferred compensation (NQDC) marketplace will be a big focus area during the integration.
“NQDC is already a big focus for Principal,” Schaaf says. “However, what this acquisition does for us is both expand this business in the mid-market segment while also creating capabilities on the guaranteed income side. Wells Fargo has an average plan size that is larger, and from the nonqualified plan perspective, their focus has been more on the recordkeeping side only. What we bring to the table now that may be of interest to customers is the ability to use life insurance in conjunction with the non-qualified program, and the mutual fund offerings as well. It’s an area to watch, we believe.”
Written commentary from the Wells Fargo side comes from Joe Ready, head of the institutional retirement and trust business. He says the combination with the Principal team creates one of the largest retirement providers in the industry. “As our leadership team has learned more about Principal, we see great commonalities between our two cultures, including our shared focus on service excellence and driving plan and participant outcomes. We look forward to the realization of our combined capabilities,” Ready says.
Jon Weiss, head of Wells Fargo Wealth & Investment Management, adds that “the scale derived from a combination of Wells Fargo Institutional Retirement and Trust and the Principal Financial Group will benefit clients, plan participants, and team members. At the same time, this sale reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management.”
Industry Comments Reflect a Big Industry Occasion
Offering a quick take on the news, Lou Harvey, DALBAR president and CEO, says the combination of Wells Fargo’s and Principal’s retirement businesses is “a great fit that makes sense for several main reasons.”
“Principal’s Midwest culture is a natural home for small plans,” he adds. “Additionally, Principal has a broad base of insurance products that are well suited for retirees from defined contribution [DC] plans. The added scale is also important in this segment of DC plans, where fee pressures are lowering margins.”
Rob Foregger, co-founder of NextCapital, which provides digital financial advice, says the deal reflects the fact that the retirement recordkeeping business “is a scale game and will continue to consolidate, with the large players getting much larger.”
“The Wells Fargo acquisition is a transformative deal for Principal, and firmly puts them in a top-five market position,” Foregger says. He adds that, while retirement recordkeeping is not necessarily viewed as an attractive standalone business—the reason why a leading firm like Wells Fargo has slowly but surely transitioned away from the space—it is viewed as very strategic by forward-looking retirement providers seeking to provide asset management, advice and guaranteed income related services to the multi-trillion dollar defined contribution market.
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