Providers Seek to Set a Positive Tone Amid COVID-19 Pandemic

From big hiring plans to targeted fee cuts, retirement plan service providers are doing their best to help plan sponsor clients and intermediaries navigate this crisis.

Fidelity Investments has announced plans to hire approximately 2,000 people this year, including advisers, to strengthen its customer service capabilities at a time when the coronavirus pandemic is dramatically impacting the daily lives of practically all Americans.

Like other providers, Fidelity says its clients need more help than ever to navigate the pandemic.

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“We have seen unprecedented engagement from our individual clients as well as 401(k), 403(b), defined benefit [DB] and stock plan participants, all of whom are turning to Fidelity to help them navigate this challenging environment,” says Kathy Murphy, president of personal investing at Fidelity.

A Fidelity spokesperson observes that between February 24 and March 31, participant call volumes increased by 25% from the same period a year earlier. Also in that period, activity on Fidelity’s participant website rose by 15%.

Leading up to this period, Murphy says, Fidelity had actually seen significant business growth from investors opening new accounts in 2020.

“To ensure we continue to provide strong support to clients, we are stepping up and hiring advisers and other financial professionals to continue helping them navigate their financial lives,” she says. “The vast majority of the roles will be financial consultants, licensed representatives and customer service representatives throughout the United States.”

Fidelity’s leadership in fact already had plans to do significant hiring this year, but given that the needs of its customers have increased, the firm is expediting the hiring process.

Context for Fidelity’s actions comes from the Alight Solutions 401(k) Index, which tracks the trading activity of 401(k) plan investors. As the markets plummeted at the end of February, 401(k) investors’ trades spiked, marking the final week of the month one of the busiest five-day stretches in the 20 year history of the index. During the month, 0.046% of 401(k) balances were traded daily, the highest level since August 2011. In particular, the net trading activity on February 28 was 15.8-times the average daily level, which surpassed the previous high of 11.8-times the average, set in February 2018.

The last week of February had more net trading activity than all of the activity in the fourth quarter of 2019. Sixteen of the 19 trading days in the month favored fixed-income funds. Asset classes with the most trading inflows in February were bond funds, taking in 47% of the flows, valued at $687 million, followed by stable value funds (41% and $597 million) and money market funds (11% and $160 million).

Meanwhile, Empower Retirement has announced that it will not be laying off any workers.

“We announced that we will not layoff any associates in 2020 for reasons related to the COVID-19 outbreak,” Edmund F. Murphy, president and CEO of Empower Retirement, tells PLANADVISER. “Empower is a growing company and we know that growth will continue. As the world heals from the crisis, employers will re-open their doors and a sense of normalcy will eventually returns to our nation. When that happens, we need to have the whole team engaged to serve these clients.”

Murphy says the firm’s client-facing associates, in particular, are keenly aware of the stress under which some employers are operating.

“This is ultimately a people business,” he continues. “Empower serves a very large segment of employers across the country and of all sizes. Since the coronavirus outbreak and the ensuing market volatility, these teams have been in very close contact with clients—maybe more than ever. We believe this announcement is going offer those clients some reassurance that we will continue to be there for them.”

Charles Schwab, for its part, has announced agreements with Intuit, eMoney Advisor and Envestnet | Yodlee to use Schwab’s application programming (API) interface connections.

Schwab says the use of APIs are a best practice in the industry that enables clients to authorize third parties to download requested account information on their behalf in an encrypted form, without storing their usernames and passwords. In turn, clients will have greater control over and better transparency into what data they share and with whom they share their data.

As part of its efforts to support plan sponsors and participants during this crisis, Schwab Retirement Plan Services has also announced it is waiving all plan amendment fees related to CARES Act provisions, and also waiving all participant loan and distribution fees from April 15, 2020 through December 31, 2020.

M&A Process Evolves Amid COVID-19 Pandemic

As market volatility and the COVID-19 pandemic unfolded in March, merger and acquisition activity slowed, raising the obvious question of how the record pace of deals will be affected by the coronavirus pandemic.

After last year proved to be a record year for both registered investment advisers (RIAs) and independent broker/dealers (IBDs) in terms of merger and acquisition (M&A) activity, 2020 got off to a quick start.

As detailed in new data provided by Fidelity Investments, financial services M&A activity in the first quarter started o­ff strong, with 20 RIA transactions in the first two months of the year, representing $28.7 billion in client assets and exceeding assets under management (AUM) totals for all of the first quarter of last year.

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However, as market volatility and the COVID-19 pandemic unfolded in March, M&A activity clearly slowed, Fidelity reports. By the end of the quarter, just three more RIA deals were inked, bringing the total to $29.9 billion in client assets. In the end, the quarter’s RIA deal volume was down 26% in terms of the number of transactions, but up 35% in client assets compared to the first quarter of last year.

Those figures have M&A experts contemplating what the second quarter, and indeed the full year, will bring in terms of deal volume. Michael O’Bryan, a partner in Morrison & Foerster’s mergers and acquisitions group, notes there are many transactions that are currently in the interim stages—with deals signed but mergers incomplete. He expects these deals will more or less continue as envisioned, but the negotiation and signing of new deals may slow significantly.

O’Bryan says it is unlikely that deals that are now unfolding will unravel, though they may take some additional time to receive full regulatory approval as the functions of government also slow.

“If you have already inked a deal, you are still governed by what is in those acquisition agreements,” O’Bryan says. “Of course, what has happened to the parties in the interim period very well may change how they feel about the deals they are now locked into, but that doesn’t mean they will have an easy way out.”

When it comes to the financial services space, many deals have been structured in terms of stock-for-stock consideration, which should ease some of the pain being felt by purchasing parties. In other words, the stock values of both companies being transacted have probably been affected in a fairly even way, meaning neither party is “benefitting” relative to the other from the new economic situation.

“Typically, if it is a stock-for-stock merger or acquisition agreement, you may find that while both parties have been hit pretty hard by this situation, they might both have been hit relatively the same,” he explains. “And looking forward, they are both facing the same issues, and so in a stock-for-stock deal there may not be as much of an impact as you would expect.”

Cash-based deals are different, though.

“In a cash deal, you can certainly imagine the attitude of the person who is supposed to be spending the cash might be a bit different today versus two months ago,” O’Bryan speculates. “In fact, while they already were benefitting from a sellers’ market, the cash price the seller is going to receive may now seem even more attractive. On the other hand, if you are paying cash to acquire a company, you may now feel like the contracted amount is too great.”

In O’Bryan’s extensive experience helping to structure such deals, sellers will typically ensure that it is the buyer who carries this cash risk into the transaction. Generally, there is not going to be much recourse for buyers who are paying early 2020 prices for businesses that are now facing a pandemic-triggered recession—or worse.

“The risk is frankly often put on the buyer in these contracts,” he explains. “Usually, in order to void such a contract, any so-called ‘material adverse effect’ experienced on the part of the company being sold is going to have to be very specific and limited to that company—for example if serious fraud is uncovered or something like that. The impacts of an epidemic or a global recession do not usually constitute a material adverse impact under the typical M&A contract.”

Looking forward, O’Bryan offers the following practical steps that business leaders should consider to navigate M&A amid the unfolding pandemic:

  • Material Adverse Effect: Courts generally have set a high bar for finding that a material adverse effect (MAE) has occurred with respect to a target company during the acquisition process. Still, in many acquisition agreements, the acquirer will not be obligated to close if the target company suffers a MAE or breaches its representations and warranties to a point resulting in a MAE.
  • Pre-Closing Operational Covenants: Acquisition agreements commonly provide that, between signing and closing, the target company must conduct its business in the ordinary manner. Those attempting to finalize a deal should provide further clarification with respect to the interim operating covenants. The target company needs to seek to clarify its right to take steps in response to the outbreak, and the buyer should seek to confirm that it is not obligated to acquire a company that has not had to comply with the operating covenants.
  • R&W Insurance: In any acquisition agreement, parties generally should assess whether the COVID-19 outbreak may require changes in, or additional disclosures with respect to, the representations and warranties made. Those seeking “rep and warranty insurance,” or “R&W Insurance,” should also be mindful that insurers are developing underwriting protocols to address COVID-19-related risks. Some insurers are proposing excluding coverage of business interruptions and other business downturns arising out of the coronavirus.
  • Regulatory Approvals: Since face-to-face interaction at the government level has ceased, it is likely all regulatory approvals may take longer than usual. To accommodate delays, parties need to consider the steps they must take and the mechanisms needed such as providing longer than usual “outside dates.”
  • Financing and Consideration Issues: The COVID-19 outbreak has rattled equity and debt providers along with acquirers and target companies. In this context, a target company should confirm whether an acquirer’s debt and/or equity financing sources remain available and check on the financing options that are offered.
  • Due Diligence. Given the challenges of having to work remotely, the process for conducting due diligence will need to change in response, taking advantage of technologies such as videoconferencing and virtual data rooms. Acquirers will need to seek further understanding of the effects the virus has had on the target company.

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