When describing the torrent of regulatory changes, shifts in consumer expectations, the pace of technology development and the race to the bottom on fees that is dramatically changing the third-party administrator (TPA) market, the words “overwhelming” and “relentless” seem appropriate.
So says Matt Schoneman, president of The Retirement Advantage, a growing TPA and financial technology support firm based in Wisconsin. Currently, TRA provides service to more than 6,000 plan sponsors and 350,000 participants, and Schoneman is not shy about the company’s plans for growth, both organic and via merger and acquisition activity.
“We are especially interested in speaking to business owners who are overwhelmed by the growing changes and regulations in our industry, who are looking for a company with more resources to support their individual needs or frankly, those who are simply burnt out,” Schoneman says.
When he joined the company in the late ‘90s, after a first career at Principal Financial Group, there was only one other employee and all the actual administration work was outsourced to a CPA firm. In the time since, the company has grown into a national provider conducting its robust administration work in-house.
It is not exactly press-stopping news to learn that a TPA wants to keep acquiring other, smaller TPA firms. Over the past 16 years, TRA has acquired and integrated more than a dozen firms into its own operations. But what is new is the rapid pace of merger and acquisition (M&A) activity—a decent amount of it sourced from firms with both an advisory arm and a TPA arm—mirroring the evolution that has already taken hold in the recordkeeping/plan provider space. In other words, financial services companies that are involved in both advising and administration are deciding they will likely have to move down one route or the other, and this has big implications both for providers in the space and for the advisers and plan sponsors working with them.
“For us this is a great opportunity,” Schoneman says. “In just the last few years we have done a number of deals with advisory firms, where the company had an adviser side to the business and also a small or mid-sized TPA firm in addition to that. With all the changing regulation and client pressures, they are looking at this as the impetus to focus on one or the other, advising or administrating.”
The reasoning is that these firms cannot be experts at everything, and particularly for those firms also employing advisers, there is the matter of the Department of Labor’s conflict of interest reforms to consider. All of these factors, Schoneman says, are driving rapid spin-offs and consolidations among TPAs. He projects that in the not-so-distant future, there will pretty much only be small, highly specialized boutique TPA firms that survive on the strength of their premium priced offerings, or large-scale national providers who can handle the capital investment requirements needed to keep today’s clients happy. At his firm, he hopes the rate of acquisitions can be doubled in the years ahead.
Many will exit the TPA business
“Given the current state of the retirement plan industry and looming questions of what the future will hold, many owners of small to medium-sized third-party administration firms are asking whether this is the time to exit the business,” Schoneman adds. “Those looking to leave the business can start the process in good conscious by engaging in an acquisition assessment.”
Naturally, Schoneman’s firm would be happy to offer one, but there are other growing TPAs out there with a similar vision. The prudent course is rarely to rush into a sale, and whoever is the buyer, making the decision to sell will be “truly a life-changing event for the owners, their families and employees,” he warns. Interestingly, he also makes this observation: “Of course, TPA firms that hold a competitive market position and have a profitable history are of great interest to us. But we are also open to having acquisition conversations with firms that have recently started to underperform in some way. From there we can assess the best options for all, including the plan sponsor clients.”
Besides selling the TPA firm in the face of these pressures, there are also other emerging options, for example the TPA support program announced earlier this year by Ascensus. The firm created new client service teams to work exclusively with third-party administrator partners and to deliver technology enhancements aimed at benefiting advisers and plan sponsors—including a new TPA website portal that supports end clients.
Other new offerings made available to TPA clients include new capabilities to automate quarterly TPA payments from plan assets; updated plan administration guides; online training via webinars and self-paced modules; and additional plan update and transaction features. James Racine, appointed during 2016 to the new role of vice president of TPA relationship management, at the time observed that TPAs “continue to play a key role in helping many U.S. workplace retirement investors maximize their success.”
“We’ve always valued the role that TPAs play in helping people save for the future,” he notes. “Organic sales, acquisitions, and new branded partners opening up TPA products have created a need for even more support for this channel. We’re happy to make the investment in these key partnerships.”