In Practice May 11, 2021

M&A Update: New Records and Picking Partners

When it comes to succession planning amid record-setting merger and acquisition activity, understanding the different partnership opportunities emerging in the marketplace is essential to maximizing a firm’s equity value.

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Wise Rhino Group has published a new analysis of the rapid merger and acquisition (M&A) activity occurring in the retirement plan advisory industry, finding the pace of deals continues to accelerate year over year.

Retirement plan advisory firm M&A activity hit record levels last year, marking the third consecutive year that deals have increased. After 13 and 26 advisory firm transactions in 2018 and 2019, respectively, 2020 saw 33 transactions, with another 22 posted in the first quarter of 2021 alone. As the team at Wise Rhino Group explains, these deal levels reflect the ongoing trend of increasing retirement and wealth advisory firm consolidation.

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According to the report, one fact that is clear amid the flurry of M&A action is that few—if any—of these deals represent a pure walk-away sale. That just doesn’t happen in this space, underscoring the notion that succession planning and business transitions often happen in steps that involve multiple partners. Put another way, for the typical advisory firm owner who is looking to use his business equity as his own retirement nest egg, the process of selling is not just going to be a matter of handing over the keys to the castle and getting a big paycheck. Instead, acquirers expect selling advisers to remain part of the business for years and potentially decades to come.

According to Wise Rhino Group, there are numerous buyer firm categories that retirement advisory firms will most likely consider when seeking a partner. In fact, the new analysis counts 26 different firms with at least one retirement advisory firm acquisition since 2018.

The types of acquiring firms include national registered investment advisers (RIAs), national insurance brokerages, regional insurance brokerages, private equity (PE) firms, wealth-focused RIAs, retirement platform affiliates and others. As Wise Rhino Group explains, each type of buyer brings different relative advantages to the table.

Retirement and Wealth Advisory RIAs: These firms were originally founded and organized to provide retirement consulting services to company C-suites. Many of these firms have since evolved past just providing C-suite services toward also engaging the plan participant through services that include advice, managed accounts and wealth advisory to participants’ broader household assets. These firms include CAPTRUST (PE partner GTCR), SageView Advisory Group (PE partner Aquiline Capital Partners) and Prime Capital (backed by a private family office).

Insurance Brokerage: According to Wise Rhino Group, these firms are arguably the best positioned to integrate retirement advisory firms, as most have established operating companies and have coveted growth currency in the form of employee benefits and property-casualty referrals. They are also the most experienced acquirers and are very effective at integrating new partner firms. Firms such as Hub International, NFP, Marsh & McLennan Agency (MMA), OneDigital, Gallagher, Lockton and USI have been the most active strategic acquirers. Other firms, including Alera Group and AssuredPartners, are beginning to emerge on the scene and offer greenfield opportunities for retirement advisory firms.

Private Equity: PE firms are highly active in the retirement and wealth advisory space, both directly and indirectly. The indirect participation has occurred primarily on the insurance brokerage side, where many of the major players are PE-backed. On the direct side, GTCR and Aquiline Capital Partners have made investments in CAPTRUST and SageView Advisory Services, respectively. These two 2020 investment opportunities drew significant PE interest. The other PE firms that might remain interested could include TowerBrook, Parthenon, General Atlantic, Lightyear Capital, Abry and Warburg Pincus.

Wealth Advisory RIA and Broker-Dealers: The wealth advisory firm aggregators have not been particularly active with retirement advisory firms. However, most are beginning to understand the significant synergy and growth advantages of having a retirement operation feeding wealth advisory opportunities. Wealth advisory firm aggregators that have acquired retirement advisory firms or showed interest include Cerity Partners, Focus Financial Partners, Hightower, Ashworth Financial, Mercer Advisors and Mariner Holdings.

Other Firms: There are a few other firms that have shown interest in acquiring retirement advisory firms, including Edelman Financial Engines (EFE), which just added Warburg Pincus as an investor partner. EFE has an advantage in this space, having built the technology plumbing between recordkeepers, adviser managed accounts and its wealth advisory business.

Compliance May 11, 2021

Bronson Healthcare Group Sued Over 403(b) Plan Fees

The lawsuit alleges fiduciary breaches related to ensuring reasonable administrative and investment fees.

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Bronson Healthcare Group Inc. and its board of directors are facing an Employee Retirement Income Security Act (ERISA) lawsuit alleging they allowed participants of the organization’s 403(b) Tax Sheltered Matching Plan to be subjected to excessive administrative and investment fees, resulting in lower account balances.

The complaint says the defendants breached their ERISA fiduciary duties by, among other things, authorizing the plan to pay unreasonably high fees for retirement plan services (RPS) and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and better performance. Bronson Healthcare Group has not yet responded to a request for comment.

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Saying that “prudent fiduciaries of 401(k) plans continuously monitor fees against the market rates, applicable benchmarks and peer groups to identify objectively unreasonable and unjustifiable fees,” the lawsuit claims the defendants “did not engage in a prudent decisionmaking process, as there is no other explanation for why the plan paid these objectively unreasonable fees for RPS and investment management.”

Certain statements in the complaint stand out as hypotheses for the plaintiffs’ claims. The lawsuit says, “There is no material difference between services needed or required by 403(b) plans and 401(k) plans. Virtually all RPS [providers] provide services to both 401(k) plans and 403(b) plans. The service offerings for these two different defined contribution [DC] plan types do not differ in any material way. Prudent fiduciaries of 403(b) plans can achieve the same reasonable prices for RPS from RPS [providers] as prudent fiduciaries of 401(k) plans.”

In addition, it says, “The underlying cost to a RPS [provider] of providing the RPS to a defined contribution plan is primarily dependent on the number of participant accounts in the plan rather than the amount of assets in the plan. The incremental cost for a RPS [provider] to provide RPS for a participant’s account does not materially differ from one participant to another and is not dependent on the balance of the participant’s account.”

The lawsuit covers a period from 2015 to 2019 and alleges that during that time, the plan’s fees were excessive when compared with other 403(b) and 401(k) plans offered by sponsors that had similar numbers of plan participants and similar amounts of money under management.

“The fees were also excessive relative to the RPS services received, since such services were largely identical,” the complaint says, adding that the excessive fees led to lower net returns than those experienced by participants in comparable 403(b) and 401(k) plans.

The plaintiffs allege that the defendants failed to regularly monitor the plan’s RPS fees and that they failed to regularly solicit quotes and/or competitive bids from covered service providers to avoid paying unreasonable fees for RPS.

The complaint notes that according to the plan’s Forms 5500, from at least December 31, 2009, through at least December 31, 2019, the plan offered Fidelity Freedom target-date funds (TDFs). The plaintiffs allege that the defendants failed to compare the active and index suites of the Fidelity TDFs and consider their respective merits and features.

“A simple weighing of the benefits of the two suites indicates that the index suite is and has been a far superior option, and consequently the more appropriate choice for the plan,” the complaint states. “The active suite is dramatically more expensive than the index suite, and riskier in both its underlying holdings and its asset allocation strategy.” The lawsuit says the defendants’ failures regarding the Fidelity Freedom Funds were exacerbated by their choice to add and retain the active suite as the plan’s qualified default investment alternative (QDIA).

According to the lawsuit, there was a strategy overhaul to the TDFs in 2013 and 2014, and, since then, the active suite’s higher levels of risk have failed to produce substantial outperformance when compared to the index suite.

“Since the strategic changes took effect in 2014, the index suite has outperformed the active suite in four out of six calendar years. Broadening the view to historical measures that encompass a period closer to a full market cycle, the active suite has substantially underperformed the index suite on a trailing three- and five-year annualized basis,” the complaint states.

Aside from the TDFs, the lawsuit alleges that the investment options selected by the plan fiduciaries “were 761.82% more expensive than prudent alternative and less expensive options covering the same asset category and same investment approach.”

The lawsuit says the defendants’ failure to engage in an objectively reasonable investigation process when selecting investments caused losses to plan participants’ accounts of nearly $10.5 million through 2019.

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