How 401(k) record keepers not part of the Fab Five can survive

Amid the massive consolidation among 401(k) providers, the top five record keepers have distanced themselves from the pack. The question that many are asking is, “Can any of the others compete, or even survive?”

Among the top five, Empower is flexing its financial muscle with the acquisitions of the record-keeping divisions of MassMutual and Prudential. Principal surpassed 10 million participants with the integration of Wells Fargo’s business, which it purchased in 2019. Voya is rumored to be buying Alight – which would double the company’s defined-contribution assets. Meanwhile, Fidelity and Vanguard are growing fast enough without acquisitions.

The Fab Five either have or are developing proprietary products and the ability to market other financial services to participants.

Still, there are more than 40 national record keepers, with plenty of capacity for all, even the Fab Five.

Some record keepers are uniquely positioned. The top two payroll companies have a strong distribution advantage in the small and micro market, with established books of businesses. American Funds has world-class asset management and distribution capabilities, while it outsources record keeping to keep costs down. T. Rowe Price is similar, though much smaller, and it has much greater record-keeping costs and a much less developed adviser distribution model. All the national banks except for Bank of America have exited the DC record-keeping business, which is very telling.

Fintechs like Guideline, Vestwell, Human Interest and Smart have raised $700 million in funding this year alone and may be able to thrive in the micro market – an area that is on track to explode, given government mandates for IRA coverage. The companies can also function as outsourced providers and license technology to those that are still using 1990s record-keeping technology.

Ascensus is a pure service bureau that doesn't rely on asset-based charges or proprietary product to be profitable. It has a partnership with Vanguard for smaller plans and has acquired more than 30 third-party administrators over the past few years.

What about the other 30-plus providers, especially if they don't have proprietary products, and especially those close to the Fab Five? They still need to deploy competitive sales forces, spend on technology and support distribution partners.

Their apparent weaknesses may be a strength and a key to their ability to remain competitive. Because they don't have robust proprietary products and participant services, they are more likely and willing to partner and not compete with DC aggregators, elite retirement plan advisers, broker-dealers and asset managers — all of whom are eyeing the 90 million DC plan participants.

The elite RPAs, and especially the aggregators, need to leverage their relationships with participants — they are closer to them and have the most trust. They need technology, tools and support to create virtual financial coaches. Providers can help RPAs build and develop the necessary resources and technology. They can co-create investment products with defined-contribution investment-only partners and support adviser-led managed accounts and retirement income solutions.

There's no doubt that the top five record keepers, especially Empower, Principal and Voya, have strong commitments to RPAs and their distribution partners and will continue to be among the most attractive record-keeping solutions. But do RPAs have the foresight and willpower to support providers other than the Fab Five that can offer more competitive pricing, technology and service?

Because when there are fewer options, the surviving record keepers will have even greater power and will be in an even better position to access and serve participants at the expense of advisers. And that is always the result of massive consolidation.

[More: The value of a 401(k) participant, quantified]

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.