Aegon, the parent company of Transamerica Retirement Solutions, has entered into an agreement to acquire Mercer's U.S. defined-contribution record-keeping business.
The deal, expected to close in the fourth quarter pending regulatory approval, will add $71 billion in assets under administration and 917,000 participants to
Transamerica's record-keeping platform. That would bring Transamerica's AUA to $216 billion and participants to 5 million. The firm would be No. 9 by AUA and No. 5 by participant count if the deal goes through, according to year-end 2014 data provided by Strategic Insight.
Terms of the deal weren't disclosed.
Aside from the additional scale the deal provides Transamerica, the retirement plan provider also touts new business opportunities and additional expertise in the large- and mega-sized niche of the 401(k) market. Transamerica also cites increased opportunity to capture rollovers into individual retirement accounts and offer retirement counseling services as benefits of the deal.
“One area we want to grow more effectively is the large- and mega-corporate space,” said Kent Callahan, president and CEO of Transamerica's investments and retirement division. “That's why the Mercer footprint is the perfect complement to our current footprint.”
Although Transamerica has large corporate plans on its platform, the bulk of its focus has been on the not-for-profit market when it comes to the large-market segment, Mr. Callahan said. Transamerica will migrate the Mercer plans to its platform over the “next few years,” Mr. Callahan said. The firm intends to bring associated Mercer staff over as part of the deal, he added.
A number of high-profile consolidations among record keepers has occurred over the past few years. Most recently, in June, OneAmerica Financial Partners Inc. announced its agreement to acquire BMO Financial Group's DC record-keeping business. In 2014, John Hancock announced a deal with New York Life to acquire its Retirement Plan Services unit, which the firms closed on earlier this year. Great-West Financial also closed on an acquisition of J.P. Morgan Retirement Plan Services' large-market 401(k) business last year.
“[The Transamerica deal] kind of struck a nerve,” said Brooks Herman, head of data and research at BrightScope. “It reminded me a lot of Great-West and J.P. Morgan.” Prior to the sale, Great-West didn't provide record-keeping services to many large corporate plans, but gained that specialty after the purchase, according to Mr. Herman.
Decreasing margins among record-keeping firms and the need for economies of scale to drive profit are factors driving the wave of recent consolidation, Mr. Herman said.
“Record keepers think, at scale, they can provide the same services at lower costs. They think money is in the volume game,” he said.
“If there is an area of consolidation, it's most likely going to be in the large-plan market first because that's where the majority of fee compression has taken place,” said Bridget Bearden, director of retirement research at Strategic Insight.
Transamerica has grown more than 14% organically, from a participant standpoint, in each of the last three years, Mr. Callahan said, and the deal “adds additional energy” to that momentum.
“One of the things we're excited about is adding scale,” Mr. Callahan said. “[It's] very helpful to provide future competitive pricing to fuel our growth.
“From my vantage point, in the next three to five years I think you'll see a lot more M&A activity,” he said. “That's my belief based on the trends we've seen.”
The Transamerica transaction likely won't have a material impact on advisers, because Mercer's DC plans aren't adviser-sold, Mr. Herman said.
Transamerica, under the deal, will also be the “preferred defined contribution record-keeping provider for Mercer's total benefit outsourcing [TBO] and total retirement outsourcing [TRO] clients going forward,” according to a release.
Under TBO, Mercer handles administration for a client under three lines of business: health and benefits, defined-benefit plans and DC plans. TRO focuses exclusively on DB and DC administration. Clients can also mix and match under a multiline offering.
Under the deal, Transamerica will partner with Mercer on the DC portion of the outsourced administration, said Sandy McCarthy, Mercer's benefits administration leader. It's not an exclusive relationship, so clients can choose plan providers other than Mercer if they wish, but Transamerica's DC capabilities will be presented as part of Mercer's requests for proposals, Ms. McCarthy said.
Mercer can now invest more resources into its health and benefits and DB administration business, which aligns better with its business strategy, Ms. McCarthy said. Transamerica's model allows for a “more purposeful focus of their resources” into the DC business, she said.
