Insurers and large fund companies, already the dominant participants in the 401(k) business, are consolidating their hold as some large banks, concerned about their lack of scale in the line, pull back.
Eight banks, including Bank of New York, Bank of Montreal’s Harris Bank and Trust, and M&T Bank, have sold portions of their 401(k) business in the past three years.
Last week Great-West Lifeco Inc., a U.S. unit of the Canadian insurer Great-West Lifeco Inc., announced an agreement to acquire U.S. Bancorp’s 401(k) defined-contribution plan business.
The deal was the Denver insurer’s second for a 401(k) business this year. In October it bought Metropolitan Life Insurance Co.’s bundled, full-service, small and midsize 401(k) business, as well as some defined-benefit plan assets.
Diane Thormsodsgard, the president of U.S. Bank Institutional Trust and Custody, said her unit made the deal because it could not generate enough scale to be profitable.
“By industry standards today, a book of 2 to 3 million participants is necessary to support continued investment,” she said. “U.S. Bank had approximately 195,000 participants.”
McKinsey & Co., a London research firm, said in a report released last year that a firm needs at least a million participants for its 401(k) business to be profitable.
“You can make a lot of money in this business if you have scale,” said Ben Phillips, an analyst at National Bank of Canada’s Putnam Lovell NBF Securities Inc. “This is a game of scale. The 401(k) industry is built on millions of tiny building blocks. When you accumulate a lot of these tiny accounts, you can dilute the costs. Scale is key.”
Not everyone sees scale as the only path to profit.
“The general belief is that scale is the answer in this business, but it is not just about size,” said Donald A. Salama, a senior managing director for New York Life Investment Management LLC. “We are a testament to that.”
The New York Life Insurance Co. unit, which has 600,000 participants in its retirement services division, has nearly tripled its assets under management since the end of 2002, to $22 billion as of Sept. 30. Mr. Salama said it has grown by defining itself as a niche provider of retirement services to high-end intermediaries and consultants.
“There are companies [with] 2 million or 3 million participants that make no money and companies that are a tenth that size that are profitable,” he said.
Mr. Salama, who is also a professional driver on the Grand Am Circuit, compared the 401(k) business to the auto industry.
“The most successful companies are not necessarily the biggest, the best, and most profitable. A company like Porsche has a great brand image, and they don’t produce tons of cars. It is about finding that defined niche and having the right brand. Scale isn’t the only way to build value and success.”
Mr. Phillips said being small brings its own challenge, because there are a lot of costs associated with this business. Insurers like Great-West and New York Life will remain in the business, because annuities with guaranteed investment options are becoming increasing popular for 401(k) participants, he said.
“These annuities [with guaranteed riders] have become a staple default option for 401(k) plans,” Mr. Phillips said.
Other providers beyond insurance companies are still looking to develop their base of assets by expanding their 401(k) business.
Charles R. Schwab, the chairman and chief executive of Charles Schwab Corp., said during its investor relations business update Monday that the San Francisco company would be interested in making a deal to expand its 401(k) operations.
Schwab has $150 billion of 401(k) assets under management and is the 21st-largest record keeper for such plans nationally, according to data from Pensions & Investments magazine.
The 401(k) business is a good way for Schwab to access younger investors, Mr. Schwab said during the webcast.
“This is one of the major areas that individual investors use to save for retirement,” he said. “Now with the new automatic enrollment, younger people that opted out will automatically begin investing earlier. … This is a great way to gain access to these young investors.”
Mr. Salama said that even though New York Life is comfortable with its size and scale, it may look to buy a firm.
“We certainly have an appetite to acquire,” he said. “We may look to acquire opportunistically, but it is not critical for our success, because our business model is different than most of our competitors.”
Regardless of whether New York Life acquires or not, it has the scale to compete, Mr. Salama said. He expects it to maintain the strong organic growth it has established in the past four years.
“Our strategy has been successful, and clearly there is a demand for the types of services that we can provide,” he said. “We have a strong organic growth plan that we plan to continue to execute.”
