The same lack of scale that forced Sun Life Financial Inc. of Toronto’s U.S. division to agree to sell its U.S. defined contribution plan administration business prompted Hartford Financial Services Group Inc. to buy it.
The purchase would give Hartford the scale to be a “top 10 player in the retirement record-keeping business,” said Marty Swanson, the chief marketing officer of its retirement plan group.
He said Hartford plans to make more acquisitions and expand organically. It would add $17 billion of retirement plan assets across 6,000 plans and 465,000 retirement plan participants to its business with its acquisition of Sun Life Retirement Services.
In January of last year Sun Life transitioned the 401(k) record-keeping and administrative services business, formerly MFS Retirement Services, to its Sun Life U.S. group, in Boston, after MFS Investments of Boston, which has been a unit of Sun Life since 1982, began to face intense regulatory scrutiny in 2004 in connection with improper mutual fund trading.
But two years later Sun Life was having a hard time competing in the business.
“After a thorough review, we determined that the best course of action is to focus on parts of the U.S. retirement and wealth market where we have or can achieve competitive advantage, scale, and a market leadership position,” said Bob Salipante, the president of Sun Life Financial U.S.
Julie DiCarlo, an assistant vice president of communications for Sun Life, said that, when the business was transitioned, Sun Life knew it needed to be bigger.
“This was a business that was not, and has never been, at scale,” she said. “After conducting a thorough review, we determined our best course was to focus instead on getting scale on areas in the U.S. retirement market where we can gain a market-leading position.”
Ms. DiCarlo said Sun Life plans to reinvest the proceeds from the sale into its U.S. variable annuities business. Sun Life’s gross variable annuity sales in the United States for the first ninth months of this year were $2.1 billion, topping 2006’s yearend tally by 23%.
The Toronto parent company has $430.6 billion of assets under management. By buying Sun Life Retirement Services, Hartford would add 401(k) plan administration offices in Boston and Phoenix.
Analysts said scale is critical in the 401(k) record-keeping business, because it allows companies to offer record-keeping and administrative services at lower costs.
According to the PlanSponsor Recordkeeping Survey, the leading providers of retirement record-keeping services are Fidelity Investments of Boston, which services 13.481 million participants, and CitiStreet of Quincy, Mass., which has 6.997 million participants.
CitiStreet, a joint venture of Citigroup Inc. and State Street Corp., has nearly doubled its participants over the past seven years. It administers more than $230 billion of assets in the United States for defined contribution, defined benefit, and health and welfare plans of corporate, government, health-care, Taft-Hartley, and not-for-profit organizations. Outside the United States it serves more than 1 million participants and administers more than $20 billion of assets.
As of Sept. 30 Hartford provided record-keeping services to $28.6 billion of retirement assets, 18,000 plans, and 840,000 participants. After buying the Sun Life unit it would have $46.2 billion of assets, 24,000 plans, and 1.305 million participants.
“This deal puts us in the right ballpark, but we have plans to get much bigger,” Mr. Swanson said.
Hartford’s retirement record-keeping business has doubled in size over the past five years without an acquisition, but “to get to the size we want to get to and to increase our scale, acquisition is going to be an important element,” Mr. Swanson said. “Sun Life is really the first step. We are always looking for other acquisitions that make sense in this business look to add scale and new capabilities.”
Hartford announced the Sun Life deal Thursday, a day after it announced an agreement to acquire TopNoggin, which offers data management, administration, and benefit calculations tools for sponsors of defined benefit plans. TopNoggin services 50 clients with more than $4 billion of defined benefit plan assets and 375,000 plan participants.
With TopNoggin, Hartford gains technology and expertise to expand its products and services for defined benefit plan sponsors. The price of the TopNoggin deal, expected to close early next year, was not disclosed.
Hartford’s retirement plan group is one of the Simsbury, Conn., company’s fastest-growing businesses, with $5.5 billion of deposits in 2006, up 23% from a year earlier. The group reported 2006 net income of $109 million, up 45%.
To continue to add scale, Mr. Swanson said, “there are a fair number of smaller record keepers out there that are faced with the same decision that Sun Life faced. There will be more consolidation in this business as companies continue to divest noncore businesses.”
Ultimately, Mr. Swanson said, this deal was about “two companies going in opposite directions.”
It has been an active year in acquisitions in the 401(k) business. Others include Charles Schwab & Co. Inc.’s April acquisition of 401(k) Co., which had $21.7 billion of retirement assets, from Nationwide Financial Services Inc. of Columbus, Ohio. In November, Prudential Inc. of Newark, N.J., announced a deal to buy Union Bank of California’s 401(k) business, which had $103 million of assets.
