In Practice November 14, 2022

Recordkeeper Consolidation Leads to Drop in Proprietary Product Share, Opening Door for Asset Managers

The consolidation of DC plan providers may not be as much of a threat to asset managers as some have thought, with recordkeeper integration needs and legal risk meaning less focus on proprietary investment options, according to new research from ISS Market Intelligence.

 

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Recordkeeper growth through consolidation has come with a decrease in the share of proprietary investment options the giants of the industry have to offer plan sponsors, according to new research from ISS Market Intelligence.

Recordkeepers with their own asset management divisions have been buying up retirement divisions at a rapid pace over the past decade, significantly boosting the participant pool that they can offer to default into their own investment options. The drop in retirement recordkeepers from about 400 to just 150 over the past decade has led to opinions that consolidation would also reduce third-party investment options available to DC plans.

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But researchers from ISS Market Intelligence see a silver lining in the trend, with the share of recordkeeper-owned investment options dropping as the firms focus on integrating plan sponsors and participants to take advantage of their new scale.

“The drop in proprietary share shows that while there is consolidation in certain areas of the market, it does not translate to all other parts of retirement,” said Alan Hess, ISS associate vice president for U.S. fund research, in an emailed response. “Firms that offer both recordkeeping and asset management services may face limits on translating dominance in one market to another, which means that third-party managers can still hope to find space on consolidated platforms.”

For the 14 recordkeepers that also have asset management divisions, the median proprietary share has fallen by nearly half over the last decade, from a high of 45.7% in 2009 to 24.8% in 2020, according to ISS Market Intelligence. That compares to total plan assets under administration jumping from $1.5 trillion to $4.7 trillion.

ISS Market Intelligence is owned by Rockville, Maryland-based Institutional Shareholder Services Inc., the same parent company that owns PLANADVISER.



Recent consolidators with asset management arms include Empower Retirement, Principal Financial Group, Transamerica Retirement Solutions LLC and John Hancock.

The acquisitions made by these firms increased total plan assets but did not add asset management divisions, according to the report. So while some of the investment managers may still be engaged with the retirement plans, they are not owned by the acquirer.

“These acquisitions help increase total plan assets, but do not include the rest of the firm’s asset management business and cause prop assets to represent a smaller portion of the new total,” ISS said in the report. “Recordkeepers with proprietary product may be able to influence plan design at the initial stages but have less room to promote such funds when taking over existing business.

Asset managers who may initially see consolidation as a threat can take the opportunity to approach retirement plan advisers, recordkeepers or third-party administrators, says researcher Hess.

“Investment option turnover might be greater among retirement plans than some asset managers would prefer, but it is a more stable market compared to the retail space, which is reflected both in the steadiness of contributions and the careful decisions that need to go into crafting and revamping investment offerings,” Hess said.

Fiduciary Risk

The relationship, however, has been scrutinized by regulators and faced litigation on funds managed by the platform owner and how well they do or do not match to other options, the report says.

On November 9, MassMutual faced just such a lawsuit by a participant accusing the Springfield, Massachusetts-based company of putting in the plan its own offerings that were not performing as well as other options. The complaint alleges part of the strategy went toward making them more attractive for an acquisition by Empower Retirement in 2020.

Empower, now the owner of MassMutual’s retirement business, did not immediately respond to comment on the lawsuit.

Overall, the gain in scale and market share has been the key motivator for recordkeepers, Hess said. Empower, which has accounted for much of the acquisition activity in recent years, has a very low share of proprietary products on its platform.

Even so, keeping participants in-house for asset management products would serve as an additional source of revenue for consolidators and keep them from flowing out to competitors, Hess said.

The firms that have the largest proprietary share of offerings are also some of the biggest firms in the general asset manager industry, according to the report. These firms include The Vanguard Group, Inc., with a leading position in mutual funds and exchange-traded funds, as well as Capital Group, which owns American Funds.

Some of the largest acquisitions in recent years have included Transamerica parent Aegon purchasing Mercer’s recordkeeper unit in 2015, Principal Financial Group acquiring Wells Fargo’s retirement business in 2019 and Empower Retirement acquiring Prudential Retirement in 2022.

Compliance November 14, 2022

A Closer Look at the Emergency Savings Provisions in SECURE 2.0

Research shows ESAs can increase investment in retirement savings accounts, but Senate bills involved in SECURE 2.0 package contain different kinds of emergency savings provisions.

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All three bills in the SECURE 2.0 package being considered by Congress during the current, lame-duck session contain provisions that would expand access to emergency savings, but only one would expand access to Emergency Savings Accounts.

It is unclear at this time, which of the provisions will make it to a final legislative package on retirement policy.

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Two of the bills originated in the Senate, the Enhancing American Retirement Now (EARN) Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE and SHINE) Act. The third is in the House-passed bill, called the Securing a Strong Retirement Act (SSRA).

An employer-sponsored ESA is an account that allows a retirement plan participant to withdraw more regularly and without penalty than a traditional retirement account. ESAs are designed to be more liquid than retirement accounts and are often invested in highly liquid assets, such as money market funds. ESAs encourage retirement plan participation, since one of the leading reasons for not participating is the fear of needing liquidity in an emergency, according to Jeff Cimini, a senior vice president of Retirement Product Management at Voya Financial.

The RISE and SHINE version contains provisions that were initially proposed as separate legislation, the Emergency Savings Act of 2022, by Senators Cory Booker, D-New Jersey and Todd Young, R-Indiana. Portions of that bill were bundled into RISE and SHINE in Title II of the bill by the Senate Health, Education, Labor and Pensions Committee.

RISE and SHINE would permit pension plans to have a pension-linked ESA and auto-enroll employees at 3% of their gross income as an after-tax elective deferral for purposes of retirement matching contributions. The balance of this account cannot exceed $2,500, and additional savings would be redirected to the employee’s retirement account. This ESA must be accessible at least once per month.

The EARN Act’s vision for emergency savings would allow employees to withdraw up to $1,000 a year from their retirement accounts to cover emergency expenses, without incurring the current 10% early-withdrawal penalty. The distribution would have to be repaid within three years of its withdrawal.

The EARN Act also allows a maximum withdrawal of $22,000 up to 180 days after a disaster if one’s primary residence is within a declared disaster zone.

Neither of the EARN Act provisions creates a separate emergency account, unlike the RISE and SHINE Act. The House version, the SSRA, also does not provide for ESAs, but it would allow a plan administrator to rely on an employee’s attestation that their withdrawal meets IRS hardship requirements, which would allow for a quicker withdrawal of funds. This provision is found in Section 317 of the SSRA but is absent in the Senate bills.

ESAs and hardship withdrawals have critical differences. An ESA is an account that is designed to be more liquid than typical retirement savings accounts so that its funds may be accessed, up to a limited amount, in an emergency. A hardship withdrawal is an exemption to the 10% early-withdrawal penalty if the money is necessary for: preventing foreclosure or eviction, to pay funeral expenses, medical care expenses, tuition expenses, or other exemptions provided by the IRS. These hardship withdrawals usually require the participant to provide evidence of the hardship, which Cimini says can be a tedious process.

Cimini believes retirement-saving behavior improves with ESAs and says short-term financial security leads to better long-term decision making.

He notes that ESAs are particularly valuable because they rely on maximum balances to ensure they are not used for daily expenses, instead of requiring onerous proof. This greatly expands their accessibility, which can be critical in an unexpected and severe emergency. Participants can therefore “define their own emergency” within defined monetary limits.

Cimini also says early withdrawal has compounding effects on the value of a retirement account, since the money withdrawn can no longer grow within the account. Research published by Voya in 2021 shows that many who liquidate retirement savings in an emergency have to do so during an economic downturn, meaning they suffer an additional opportunity cost of selling investments at lower prices than they might have otherwise.

If the current Congressional session can arrive at a consensus and pass a composite bill, likely by attaching it to an additional piece of legislation, these changes could take place as soon as this December.

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