Retirement plan recordkeepers have undergone tremendous change in recent years, driven by consolidation and a race to innovate and scale. According to Mike Webb CAPTRUST senior manager of plan consulting, only about 50 recordkeepers remain—15 years ago, there were 400. That may appear to make for slim pickings for retirement plan sponsors, but recordkeepers are redefining what it means to be a provider in this space. That’s actually good news (mostly) for plan sponsors and participants.
A recent article from registered investment advisory firm CAPTRUST explained how the recordkeeping landscape is changing, and what that means for plan sponsors and advisors. Recordkeepers offer a broad suite of products, from financial wellness to technology to personalized advice solutions. That means a shift in the way plan sponsors and advisors relate, too. Advisors must now act as an educator and guide, helping sponsors understand and make informed decisions about each recordkeeper’s unique products, services, revenue streams, and outsourcing arrangements.
In the past few years, recordkeeper consolidation has created a sea change in the industry, influenced by the need to achieve greater efficiency, a desire to leverage technological advancements, and a drive to expand service offerings. Rapidly changing regulations and tight margins also made it difficult for smaller recordkeepers to compete, fueling mergers and acquisitions with larger providers.
Recordkeeper consolidation means a less cumbersome selection process for plan sponsors, as there simply aren’t as many providers to choose from. But, it also prompts concerns about a lack of competition, the potential for price hikes over time, and the need for plan sponsors to conduct extra careful due diligence to ensure their chosen recordkeeper fits with their plan’s goals, needs, and values, and that they’re meeting participants’ needs.
The average recordkeeper merger or acquisition can take anywhere from six to 18 months. During that time, there are many fiduciary landmines plan sponsors need to be aware of, according to Mr. Webb. “‘For plans where the current recordkeeper is the acquiree, sponsors should exercise the same degree of fiduciary due diligence in determining whether to remain with the new recordkeeper as they took to select the existing recordkeeper,’” he says. “‘For plans where the current recordkeeper is the acquiror, sponsors should verify that the acquisition will not impact the recordkeeper’s ability to provide best-in-class service.’”
The consolidation also means recordkeepers are redefining their services by delivering a more comprehensive suite of offerings, and they’re turning to strategic partnerships to pull it off. That’s a double-edged sword for plan sponsors. On the one hand, more offerings means better value and participant engagement. On the other, plan sponsors must be wary of how those arrangements are structured, and what that means for the services they’re receiving and the participant experience. Outsourcing also potentially exposes plan sponsors to fiduciary and cybersecurity risks, which necessitates an extra layer of due diligence and scrutiny. According to CAPTRUST, “How is the recordkeeper using plan data? Are they sharing personally identifiable information (PII) with their technology partners? And do those partners have the same level of data security as the recordkeeper? Plan sponsors are increasingly relying on advisors to help understand the answers to these questions.”
In an effort to stand out in a crowded marketplace, recordkeepers are offering services beyond traditional recordkeeping, such as financial wellness programs. Recordkeepers are relying on these diverse service offerings to maintain profitability due to fee compression brought on by competitive pressure and squeezed to near breaking points.
Finally, CAPTRUST observed that advisors’ roles have expanded along with recordkeepers’ service offerings. No longer simply investment experts, advisors now have to understand their sponsor clients and their needs, and use that knowledge to recommend the best solutions for plan sponsors and participants while making sure fees are reasonable for the services being provided.
“As recordkeepers evolve—embracing new roles and offering innovative solutions—the role of plan sponsor becomes ever more complex, yet ripe with opportunities. Navigating its nuances requires a discerning eye, one that can identify the true value behind enhanced technology platforms, comprehensive service offerings, and the promise of a better retirement planning experience for participants. With the guidance of a financial advisor and a clear understanding of their organizational goals and participant needs, plan sponsors are well positioned to make informed choices that align with their missions and values,” according to CAPTRUST.
