With its deal to buy Amvescap Retirement Inc.'s $21 billion book of 401(k) record keeping, Merrill Lynch & Co. has recommitted itself to a business it seemed to be pulling back from in a 2000 outsourcing deal.
A Merrill executive says the giant brokerage house was familiar with the Amvescap business and believes it can "make it grow," in part, through expansion in the bank channel with private-label retirement plans.
Cynthia Hayes, a first vice president in Merrill's retirement group, said Amvescap Retirement, the Atlanta-based U.S. defined contribution record keeping business of Amvescap PLC, "built a large-company-type, robust platform but didn't have the distribution mechanisms." And Merrill has "been talking about expanding our capabilities and our reach in partnering with banks and insurance companies," she said.
Merrill is expanding in the midsize-plan segment of a business whose small-plan segment has been inadequately profitable, spurring many companies to get out of the record keeping business altogether.
One such deal was Des Moines-based Principal Financial Group's purchase of the Chicago-based pension and retirement business of ABN Amro last December. ABN Amro sold defined contribution record keeping and investment services in the United States, administering about 300 401(k) plans, with an aggregate $3.6 billion of assets.
In addition CNA Trust Co. in Costa Mesa, Calif., sold its retirement plan trust and record keeping business to Union Bank of California last August. The deal doubled Union Bank's retirement plan business, bringing its defined contribution assets to more than $10 billion.
And Bank of New York Co. Inc. sold its record keeping and trustee services business to Wachovia Corp. in December 2003. The unit had about $2 billion of assets and 133 clients.
Northern Trust Corp. in April 2003 sold its retirement consulting and administration business to Hewitt Associates Inc. in Lincolnshire, Ill. The business supplies nearly 200 companies and more than one million people with defined benefit, defined contribution, and retiree health and welfare administration services, including record keeping.
Regarding banks, Ms. Hayes said, the impending retirement waves of baby boomers offer "plenty of opportunities for the banking industry to grow their position. Merrill now has capabilities to help support that. We want to build a stronghold in that marketplace" for midsize and large plans.
Banks that provide 401(k) services include CitiStreet, the joint venture between Citigroup Inc. and State Street Corp.; Wells Fargo & Co.; as well as Union Bank of California and Wachovia.
"Our intention is to go to banks that Amvescap was already servicing," Ms. Hayes said, "and we want to differentiate our products. We believe we have support for banks from the sales and service perspective and we have all the investment access of mutual fund programs, collective trusts, and separate accounts."
"We can bring our programs to the bank to private-label," she said, noting that Merrill also could supply advisory products and integrated benefit solutions. "Our belief is that the banking industry can be a robust retirement provider," she said.
Amvescap Retirement is to become a Merrill subsidiary, Princeton Retirement Group Inc., which will serve retirement plan sponsors, as well as other financial institutions and intermediaries. Services to other institutions will carry neutral branding to complement the distribution, product, and client-service requirements of each institution that becomes a customer.
Amvescap Retirement's services are distributed through a direct sales force, alliances with other service providers that deliver the company's investment products, broker-dealer channels, and strategic partnerships with other service providers.
The deal would expand Merrill's retirement business to about $350 billion of client assets under administration, said Ms. Hayes. The retirement group served 5.7 million people and more than 29,000 business retirement plans at Dec. 31.
Ms. Hayes declined to discuss terms of the deal that was announced Thursday but said she expects it to close within two months.
With this transaction, Merrill has recommitted itself to defined contribution record keeping, said Geoff Bobroff, an asset management consultant in East Greenwich, R.I.
Mr. Bobroff said the consolidation of 401(k) record keeping "will continue." Fewer large 401(k) plans are being created, he said, and the small end of the market is not cost-effective for retirement providers.
"We needed to reacquire to grow in the $3 [million] to $40 million segment," Ms. Hayes said, and to offer private-label capabilities or non-Merrill-distributed business.
In late 2000, Merrill had taken a step back from the business when it outsourced its small-plan 401(k) business to Bisys Retirement Services, said Ms. Hayes. Bisys took over record keeping for Merrill's Business Market 401(k) product line on Nov. 15, 2000.
Bisys in Little Falls, N.J., handles record keeping for 5,000 Merrill Lynch small-market 401(k) plans with less than $3 million of assets each. The brokerage company has continued to perform investment services, such as asset management and investment processing, as well as sales and marketing for the plans.
Amvescap Retirement has offices in Winston-Salem, N.C.; Lincoln, R.I.; and Denver, besides Atlanta. Bill Hensel, a spokesman for the company said Merrill would absorb most of the retirement unit's employees.
Charles W. Brady, the executive chairman of Amvescap PLC, said in a press release that his company, though it will no longer keep plan records, "remains committed to providing investment products and solutions to the growing U.S. defined contribution marketplace through both AIM and Invesco."
Merrill Lynch has an alliance with Amvescap that also includes MFS Investment Management, State Street Research and Management, Paychex, OppenheimerFunds, and Bisys. The alliance offers MLConnect, Ms. Hayes said, a network of retirement plan programs for plan sponsors with less than $50 million of assets; it is intended to give advisers more fund choices for their clients.
