Massachusetts Mutual Life Insurance Co. sees its deal to buy First Mercantile Trust Co. from SunTrust Banks Inc. as the first of many steps in its effort to expand its retirement services business.
First Mercantile's $5 billion of assets under management, along with its distribution network and products, would help MassMutual reach its goal of doubling its retirement assets, to $80 billion, within three years, said Elaine Sarsynski, who took over the retirement services division in January.
Ms. Sarsynski, who is also the chairman, president, and chief executive of MassMutual International LLC, said 60% of the increase should come through organic growth, with acquisitions accounting for the rest.
"We are looking for those acquisitions that complement the products and services we currently offer, that have strong management teams, a book of business that is sticky, and a strong product suite and fund performance," she said.
Along with the assets, the First Mercantile deal, announced last week, would give MassMutual expanded access to the important registered investment distribution channel.
Also, First Mercantile offerings include collective investment trusts, something currently absent from MassMutual's menu.
Collective investment trusts are similar to mutual funds in that they provide portfolio diversification, professional management, and investment flexibility. But the trust funds tend to have lower operating expenses, since they lack some of mutual funds' administrative fees and are not subject to the same regulations.
The U.S. defined contribution plan market alone was $4.4 trillion as of the second quarter, according a study by the Investment Company Institute, a Washington company that tracks the industry, and Mercatus LLC, a Boston consulting firm.
MassMutual says its retirement services division, formed more than 60 years ago, serves about 1 million participants. Fidelity Investments is the largest 401(k) platform provider, with more than 10 million participants, according to Mercatus, which recently ranked MassMutual 26th.
Teresa Epperson, a partner with Mercatus, said the deal for First Mercantile is part of a consolidation trend that is still in its early stages.
In 2005, for example, Merrill Lynch & Co. Inc. bought Amvescap PLC's U.S. defined contribution record-keeping business. The following year StanCorp Financial Group Inc. of Portland, Ore., acquired the Pittsburgh retirement services firm Invesmart Inc. This past spring Charles Schwab Corp. bought 401(k) Co., an Austin administrator of defined contribution plans, from Nationwide Financial Services Inc.
More deals are on the way, Ms. Epperson said, as big companies look to add scale and independent firms have a harder time in what is a high-cost, low-margin business.
"Basically, it's a scale business," she said. "As a stand-alone, it's very hard for these businesses to make a profit in and of themselves."
Ms. Sarsynski said she wants to increase sales 25% organically this year, to $5 billion. In addition, her company plans to roll out several new products in the next 12 months.
In a consumer survey Mercatus conducted last year for the Bank Administration Institute, 9% of respondents said insurance companies are extremely or very suitable to be their retirement services provider. Independent advisers fared best, with 32% of respondents saying they were extremely or very suitable; banks registered 16%.
Ms. Sarsynski said MassMutual has little retirement services distribution through banks, though First Mercantile has relationships with more than a dozen small and regional banks. "We hope to learn a little more about this distribution model and are looking forward to doing more there."
First Mercantile provides retirement plan record keeping and investment management services nationally to more than 3,100 plans with about 140,000 participants. The unit would retain its Memphis headquarters and its management team, Ms. Sarsynski said.
SunTrust, which inherited First Mercantile in the 2004 acquisition of National Commerce Financial Corp., would not discuss the deal.
Ms. Epperson said insurance companies have been slow in their efforts to capture retirement business, and are focused on catching up.
"I think we are going to see a lot more action in this space on the part of insurers," she said. "They are really trying to capture their share of the retirement opportunity."
The deal is expected to close next quarter.
