Can the Big Recordkeepers Keep Getting Bigger?

Unlike many of Fidelity’s top executives, Kevin Barry, president of workplace investing, has not spent his entire career at the firm.

Prior to Fidelity, Barry spent some 15 years working in finance roles for large consumer products companies, including Gillette and Frito-Lay. He says that his previous experiences continue to give him an important perspective into the way finance and human resources departments have to come together to build and maintain quality retirement programs. He also got an important view into the way large and small companies’ diverse workforces require a range of support services from retirement plan providers.

“One thing I learned in my earlier career in consumer products is that there is both a rational and an irrational component to how people make decisions about any product or service,” Barry says. “This is true when talking about razors or snacks, but it is also true in the financial services space.”

One element of his current gig that is quite different from the earlier consumer products work, Barry says, is that the retirement plan industry has a serious jargon problem that has held back growth. It’s hard enough to demonstrate to a potential customer what makes a given potato chip flavor better or different, or why they may want to consider buying a particular razor blade. Explaining complex financial instruments to consumers with a low level of investment savvy is even harder.  

“We don’t always help ourselves by using very complicated language,” Barry says. “Yes, there are always going to be non-intuitive parts of this business. There is so much potential complexity and a whole language of finance to be learned, but when you pull back a lot of this jargon, at the end of the day, there are simple and effective ways to communicate about investments.”

According to Barry, the key to success for recordkeepers and plan sponsors alike is to remember that it is always a human being that is facing any given buying decision, whether one is talking about consumer products or investments.

“We need to be aware of the client’s journey,” Barry says.

A shifting competitive landscape

During Barry’s time with Fidelity, the company has grown to be the largest provider of recordkeeping services to retirement plans—now overseeing thrice the assets of its nearest competitor, according to the latest PLANSPONSOR Recordkeeping Survey.

As Fidelity has grown, other companies have grown as well, and many have undergone major mergers and acquisitions that have reshaped the list of top providers. Most recently, the announcement of Principal’s acquisition of Wells Fargo’s retirement plan business further reduced the list of recordkeepers from which plan sponsors can choose. The trend of recordkeeper consolidation has been ongoing since at least 2009. In fact, an analysis of the top 20 recordkeepers by assets in 2009 versus 2017, performed by Brian O’Keefe, PLANSPONSOR’s director of research and surveys, finds only four have not pursued an acquisition-based growth strategy.

Asked about what he sees as the future of Fidelity and its competition amid a shifting industry landscape, Barry says the firm will continue its current strategy of pursuing strong organic growth. It will also be closely watching the M&A activity of its competition.

Barry says he does not think the firm or the industry in general has achieved a peak size, even as withdrawals from retirement plans are growing as the Baby Boomer generation enters retirement. This is because there are still many millions of Americans who lack access to retirement plans at work. In addition, firms like Fidelity, which have long been focused on serving 401(k) plans and individual retirement accounts (IRAs), are moving into other service areas, such as student loan repayment benefits.

“In late 2017 we launched the student loan debt repayment program, and there has been an enormous amount of client interest—thousands have asked about this and have started to learn about how you can add value in this area as a plan sponsor,” Barry said. “Of course, there is a learning curve. Today, we have 59 clients already using the student loan program so far and multiples of that in terms of those with serious interest.”

Barry expects this business line to continue to heat up, thanks in no small part to the private letter ruling issued by the IRS to approve a benefit already being offered to the employees of Abbott Laboratories. In that student loan repayment program, the employer makes a non-elective retirement plan contribution on behalf of an employee, conditioned on that employee making sufficient student loan repayments. The program is voluntary—an employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions.

“This type of budget-neutral approach solves one of the key hurdles to greater adoption of student loan programs, which is that most companies that would consider this have generous benefits programs already, and they have a budget cycle internally that they have to work with,” Barry says. “It takes finance and human resources getting together to find the dollars for this type of program.”

Challenges facing recordkeepers.

Looking to the long-term future, Barry says, recordkeeping will clearly remain “an incredibly challenging and complicated set of services wherein delivering consistent quality is not easy to do at the price point that clients demand.”

“At Fidelity, stability, service, quality and price is what we compete on,” Barry says. “In that sense, we don’t get distracted by the industry consolidation. Given our position in the marketplace, we are focused on the day-to-day service quality, but we also have to focus on asking ourselves where we are going in five years and 10 years. If we just hang our hat on service quality and we don’t think about the future of the industry, the definition of great service is going to change over time, and so we would be setting ourselves up to fail.”

Barry notes that an important question for all providers (and plan sponsors) to contemplate is whether the number of providers that a given customer interacts with is growing or shrinking. In his estimation, financial services consumers are growing more comfortable with consolidating their provider relationships. They like the idea of being able to manage their money in a coordinated and rational way, Barry says. 

“There is an increasingly sophisticated set of products and components coming out every day in terms of investment options,” Barry explains. “At the same time, participants’ ability to deal with complexity is not really growing. This is why target-date funds are so popular, and why robo-advisers continue to gain traction.”

Barry expects there will be growing demand for consolidated financial services from “those people who don’t have the will, skill and time to manage their short- and especially long-term finances.”

“Workers are increasingly looking for a company that they trust to integrate all of this stuff,” Barry suggests. “Financial services companies that can play this role as the hub of the investors’ financial life will be the most successful.”