M&A Shows Up As Top Driver of Recordkeeper Swaps in New Study

Rampant mergers and acquisitions activity is not just taking place in the retirement plan advisement and wealth management sector: in fact, M&A among plan sponsors is cited as a top catalyst for them changing recordkeepers, according to a Cogent Syndicated report from Escalent.

When asked why they decided to switch plan providers, 22% of plan sponsors who made a change in the past two years cited a merger or their acquisition by another firm.

The Impact of M&A

“As a company is doing better and [is] able to hire more employees, it’s a good time to reassess [whether a plan] is offering the best services for [their] participants,” says Sonia Davis, senior product director at Escalent and the author of the “2024 Retirement Planscape” report.

Davis explains that when two companies merge, the plan population will become more diverse, as participants could be working in different industries and regions. As a result, she says, participants will have different servicing needs and some might want access to more sophisticated investment options than others. It is important for recordkeepers and providers to have solutions that cater to the needs of everyone in the plan, Davis says.

Switching providers requires significant administrative work, especially when transferring new employees onto a different platform, but Davis says a merger or acquisition provides a good opportunity for plan sponsors to reevaluate the services they need.

Overall service quality was the No. 1 reason plan sponsors changed providers, and many also cited plan investment fees, participant engagement and administrative fees as reasons for their change. Lack of accountability when resolving an issue and quality of investment options serve as secondary triggers, according to the report.

In its online survey of 1,391 401(k) plan sponsors, Escalent analyzed micro (managing less than $5 million in assets), small-mid ($5 million to less than $100 million) and large-mega (at least $100 million in assets) plans between February 14 and March 12.

Escalent found that average recordkeeper tenure in the 2024 report was 7.5 years among large-mega plans, down from 8.4 years in 2022. Among plan sponsors who issued RFPs in the last year, 19% of large-mega plans anticipate changing providers. Davis says this suggests that challenger firms are starting to have greater success attracting new business from incumbents in the large plan size cohort.

Davis stresses that more than 30% of these provider-plan relationships have been in place for 10 years or more, but it is notable that more opportunities are opening up for new providers with large and mega plans, because historically this has not happened often.

Large-mega plans reported the highest likelihood of switching plan providers, with more than one in five saying they are likely to swap out their respective recordkeepers. The Escalent report noted that actual switching rates are typically lower than stated intent, as incumbent providers are often successful in retaining current plans once they go out to bid.

The 2024 PLANSPONSOR Recordkeeping Survey also found that a majority (61%) of plan sponsors maintain relationships of more than eight years with their recordkeepers.

Meanwhile, nearly six in 10 micro plans said they are “not at all likely” to make a switch, acknowledging how tough it can be to convert existing recordkeeping business, even among plans with fewer assets.

Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services, says he has serviced a lot of plans going through M&A, either folding clients into an existing plan or dissolving a plan.

He notes a few current projects in which companies are merging participants into one plan or consolidating down to two. Some of his clients, he says, are private equity-owned, and the deal market in PE is contributing to plan changes and new design needs.

“I’ve seen more M&A over the past five to six years than I have in my career, and it’s not even close,” Sampson says. “It’s a lot of moving parts, but it’s fun, because it’s different.” 

Cybersecurity a Top Concern for Plan Sponsors

Another key finding from Escalent’s report was that the threat of a cybersecurity incident or data breach has risen to the top of 401(k) plan sponsors’ concerns across all plan-size cohorts.  

For the first time in the history of the study, cybersecurity issues eclipsed fears surrounding underperformance of plan investment options. In fact, the share of plan sponsors citing cybersecurity concerns among their top three overall fears is up substantially, expanding to 47% from 40% in 2022, according to Escalent.

Two significant data breaches have occurred in the last few months, exposing plan participant personal information. More than 451,000 plan participants at J.P. Morgan Chase were impacted by a data breach in April, and 1,883 employees who participate in the Walmart 401(k) Retirement Plan and use recordkeeper Merrill Lynch had their personal data exposed in May.

Davis says there is likely a correlation between the number of breaches and the fear plan sponsors are expressing. She adds that plan sponsors put a strong emphasis on data security and cyber-risk management practices when looking to hire a new plan provider or recordkeeper.

“For recordkeepers, they have the opportunity to be very explicit and talk about what they’re doing to ensure security is there for participants, because it could be a real headache for all parties involved,” Davis says.