While big brand record keepers dominate the headlines starting with Fidelity, Empower, Vanguard, Principal and Voya, which have the most participants in the advisor-sold 401(k) market along with the payrolls, fintechs and not so small firms like Manulife John Hancock, Transamerica, Capital Group, Ascensus and T Rowe Price, there is a thriving group of independent, some regional, providers that advisors should be considering.
As record keeper consolidation disrupts service and relationships with the larger brands, many of which are focusing on participants’ services and offering almost zero-profit pricing, which puts them in competition with advisors, independent record keepers exist in a totally different universe. Their cost structure with much fewer field salespeople and lower corporate overhead does not require the same type of scale to survive or thrive, with owners and senior managers directly involved in the day-to-day.
Technology and service costs for the big brands are stunning, forcing many to pivot to wealth services, and while their technology and data security may be superior in some aspects, advances, especially in AI, as well as new platforms, may be leveling the playing field.
Scale does matter even for regional independent record keepers. There are almost 250 firms, according to Paul Nuveau, CEO of BPAS, which have 1 million participants, half of whom are in DC plans, and $16 billion within 6,300 plans. He noted that almost 200 firms have less than 100,000 participants, which he suggests may be unsustainable.
The consolidation of smaller independent firms may heat up as FIS launches a cloud-based version of Omni, and Relius no longer supports installed versions, requiring many and eventually all to convert, potentially forcing out smaller firms. Similar moves by Schwab’s SRT system are rumored. Though the new systems may level the playing field for independents with upgraded systems, there will be upfront and conversion costs as well as ongoing support by in-house professionals that many smaller firms cannot afford.
There are a few larger independent providers like BPAS, Alerus and EPIC, all owned by regional banks, as well as regional ones like Employee Fiduciary with $7 billion and 5,200 plans, which have a clear advantage over the other 200 that have less than $750 million in DC assets.
While firms like former Spectrum, led by Managing Partner Petros Koumantaros, part of the infamous ABG consortium, have recently been sold to the newly named Daybright, most of the recent M&A activity involves compliance-only TPAs. Serial buyers of smaller firms like EdgeCo, which owns American Trust, have been quiet, leaving the question of who the buyers are, just like with bigger, national brands.
The advantages of working with an independent TPA record keeper can include lower and more transparent pricing, according to Employee Fiduciary CEO Eric Drobleyn. As small and mid-sized plan sponsors and advisors get more sophisticated, they uncover the revenue sharing that many big brands use to supplement costs, including platform fees. Although many big brand providers enjoy lower investment fees due to scale, this pricing is being democratized.
Petros claims that regional firms have deeper relationships with their local business communities and leaders, which can help advisors with business development.
The “one throat to choke” theory benefits independents over big brands who work with TPAs, deploying an unbundled model, which adds to the cost to the plan, separate from the recordkeeping fee.
Many advisors are complaining about the degradation of service from big brands whose costs are going up just as their fees are declining, with more firms deploying AI agents to try to answer questions, forcing advisors to step in. BPAs’ Nuveau claims, “We call back right away.”
Record keeper consolidation requires that clients adopt new systems and often the loss of their trusted relationship manager. “Almost all of our business is take over,” notes Jeff Feld, partner at Alliance Pension Consultants with $3.3 billion and 1,000 plans. “We solve problems.”
Big brands deploy hordes of talented salespeople who act as support for RPAs, especially during the sales process, and can help navigate the home office when issues arise. But they are not paid to provide ongoing service—they are paid to sell plans. Larger RPA firms with scale may get better service from big brands, but they also face competition from these providers.
As the convergence of wealth, retirement and eventually benefits heats up, most of the big brands need to lean in to supplement declining and competitive plan fees, often forced to compete with advisors, with some high-profile record keepers reluctant to share data, citing security issues. The independent providers do not face the same issues with a lower cost structure and many, like BPAS, offer health and benefits services, and provide HR outsourcing.
Most of the big brands have been forced to offer options for all plan sizes up to $500 million. But certain segments favor different types of record keepers. The micro market expected to explode will continue to be serviced by payrolls and fintechs that partner with payrolls as well firms like Manulife, JP Morgan and Morgan Stanley. Wealth advisors and broker/dealers may lean toward big brands they know, and that support their businesses, who use local compliance-only TPAs. Mid-market advisors have strong relationships with big brands, although the list of viable firms is dwindling. And larger plans may be reluctant to take chances on lesser-known brands where pricing as well as service is competitive.
RPAs looking to leverage convergence should be considering the scaled independent firms as an option, where technology is getting better and cheaper, and where service and support may be higher, especially for more sophisticated clients that have different types of retirement plans. It only makes sense for them to explore partnerships with well-heeled and technology-savvy independent record keepers.
