Empower's $3.55 billion deal with Prudential makes the 401(k) world a lot smaller

Empower Retirement’s massive deal announced today to buy Prudential’s retirement plan business marks the second major acquisition the company has made in less than a year.

Last year, the Greenwood Village, Colorado-based plan provider picked up MassMutual’s defined-contribution business via a reinsurance transaction with a ceding commission of $2.35 billion, along with a $1 billion capital injection. That deal added 26,000 retirement plans and 2.5 million participants to Empower’s book.

The company also last year reached a deal to buy Fifth Third’s plan business, which included 476 plans, with a total of $6.21 billion in assets. And Empower also bought hybrid adviser and wealth manager Personal Capital.

Empower is already the second-biggest U.S. plan provider by number of participants, behind Fidelity. The Prudential deal will add $314 billion in assets among 4,300 plans, boosting Empower’s size to $1.4 trillion among 71,000, according to the firm.

That Empower continues to grow through major deals makes sense — the company was the result of several businesses that were combined in 2014. Great-West, which had fused its retirement business with Putnam’s and had acquired J.P. Morgan’s large-plan business, renamed the unit.

The recent acquisitions “are not small, and they’re not easy,” CEO Edmund Murphy said. “They’re actually quite complex.”

The company’s parent firm, Power Corp.-owned Great-West Lifeco, had given Empower its blessing to go after big purchases. But following the Prudential deal, Empower might not pursue bigger acquisitions for a while.

“We’ve got our heads down and will have our heads down for some time … continuing to serve the nearly 70,000 clients we have, and 12.5 million participants,” Murphy said.

The company is on track to have its biggest year ever, with $100 billion so far in sales that have either been funded or committed, he said. There is also roughly $1 trillion in its pipeline, he said.

WHAT DROVE THE DEAL

Empower wanted Prudential’s retirement plan business for several reasons, Murphy said. The first, most obvious one, is the number of plans and participants — something that is all but critical in the record-keeping industry.

“The businesses is a scale business. We, like everybody else, continue to experience fee pressure,” he said.

Consolidation of record keepers has accelerated due to 401(k) fee litigation, as providers have had to compete on cost “with very little to differentiate the services or the pricing,” said Lou Harvey, CEO of Dalbar, in an email.

“This will continue until a disrupter enters the market with added value or there is anti-trust intervention,” Harvey said. “The differentiation can come in the form of technology, service levels or offerings that participants value and are willing to fund.”

The biggest players in the industry have been increasing their lead over the smaller ones, said George Revoir, principal at AMRev Consulting, in an email.

“The biggest issue is the divide between the haves and the have nots,” he said. “Fidelity, Principal, Empower [and] Voya are meaningful by most measures to the distribution world.”

Empower has an interest in boosting its plan participant count to get more business with Personal Capital, he noted.

Further, Prudential’s business covered markets that added well to Empower’s, particularly large plans in the corporate market as well as government, health care and the Taft-Hartley plan segment, Murphy said. The latter is a market Empower only recently entered, through its acquisition of MassMutual’s business.

Prudential’s record-keeping business also had some tech capabilities that will benefit Empower, including those in its proprietary nonqualified and defined-benefits systems, he noted.

“The rationale for this was really multidimensional.”

Empower will extend employment offers to about 1,850 Prudential employees, who will be able to continue working at their current locations, including remote arrangements, he said.

The sale is expected to close in the first quarter of 2022, and Empower will begin migrating retirement plan client to its record-keeping system in the third quarter of next year. That process will take about 12 months, Murphy said. Prudential’s plan clients will continue to work with the service teams that they have relationships with, he noted.

“I see very little to no disruption to the clients.”

Murphy also had a message for retirement plan advisers.

“We continue to work with and through intermediaries,” he said. “Our strategy hasn’t changed. We don’t sell direct, like other firms. We only bring on new business through advisers.”