Talking Scale With Voya, Sterling Resources Leaders

Over the past decade, the universe of retirement plan recordkeepers has contracted from about 400 to approximately 150, with no signs of slowing. Experts say one lesson learned in this time is that not all scale is created equal.

Peter Demmer is the co-founder of Sterling Resources and has executive management responsibility for the firm’s strategic consulting practice.

As Demmer tells PLANADVISER, Sterling Resources specializes in supporting retirement plan services in the U.S. and international markets, providing financial and business analysis, including merger and acquisition (M&A) support and market research services. Naturally, given the tremendous amount of consolidation that has occurred in the retirement plan space over the past decade or so, Demmer has been following the trends closely, conducting proprietary research and consulting directly with some of the largest and most dynamic retirement plan service providers.

Providing some context for his work, Demmer notes that, over the past decade, the universe of retirement plan recordkeepers has declined from about 400 to approximately 150, with no signs of slowing. At the same time that the number of providers has shrunk dramatically, the role of the retirement plan services industry has grown significantly, with more people and assets invested in the system than ever before. All told, total U.S. retirement savings total approximately $35 trillion.

Demmer says this story of increasing scale is often misconstrued or is not always presented with proper context.

“What I mean is that not all scale is created equal,” Demmer explains, citing internal data showing that only about half of the recent M&A transactions appear to have added significantly to pre-tax profits in the proceeding years after the closing of the sale.

The Sterling Resources data shows participant volume continues to be the most important driver of expenses, in particular for the two components—client service and technology—that have the highest fixed cost values. However, the number of plans, the volume of assets and other variables are important expense drivers as well. The costs that appear to be least impacted by scale are sales and indirect/overhead allocations.

The main negative drag on profitable M&A appears to be having little experience in integrating diverse books of business, Demmer says. Other negative factors such as complex service structures or multiple platforms of the seller added to slow conversion of the acquired book. Factors that contributed to post-M&A success, on the other hand, were rapid integration into a single technology and process platform. Another important factor was an ability to offer a substantial cost benefit along with “real service breadth improvements” to the sellers’ clients, he notes.

The research also made clear that “fixed costs” don’t stay fixed forever, whether before or after an M&A transaction. In other words, for the average provider in Sterling’s client base, the fixed costs of the major components of client service aggregated to about $37 per participant as of four years ago. Today the figure is closer to $50 per participant. As Demmer sees it, this indicates an uptrend in defining adequate scale or fixed cost savings potential.  

Reflecting on these points, Charlie Nelson, vice chairman and chief growth officer at Voya Financial, says there is no doubt that the retirement industry M&A activity that has defined the past decade will continue for the foreseeable future.

“The competition for scale continues to accelerate,” he tells PLANADVISER. “We’ve seen consolidation even among and within the 10 largest providers, and by some measures as much as 75% of all retirement savings assets are now recordkept by the top 10 providers. Even the biggest and best firms are seeing intense competition among themselves.”

Nelson points out that Voya (and many of its peer firms) now actively engage with Sterling Resources to conduct and share anonymized market performance research, giving these firms a direct way to compare their own profitability and efficiency—not to mention the quality of their service deliverables—with that of the broader marketplace.

“Over the longer term, we plan to advance our technology infrastructure to facilitate our accelerated growth,” Nelson says. “It will be about leveraging investments in our data, digital and analytics capabilities, and our automation capabilities. It’s all in the spirit of driving improved outcomes and enhanced client solutions for individuals.”

As to whether Voya has more acquisitions up its sleeve, Nelson says the future is open.

“I can tell you that I don’t believe that we need inorganic acquisition activity to meet our growth plans for 2021, but as we navigate the coming years, we will most definitely be looking for opportunities that can help us grow even faster,” he says. “It’s not a prerequisite that we do this in the near term, but we will absolutely be looking out with this strategic view.”