Principal Continues Focus on Asset Management, ‘Jet Fuel’ of the Business

Dan Houston

Dan Houston is the head of a $17 billion global company. He is also the kind of CEO that, after an interview, casually hands out his business card as if you might call him later to discuss which income annuity to recommend to your aging cousin.

Houston’s relaxed manner may stem in part from Principal Financial Group’s Des Moines, Iowa roots (though to be fair, he met PLANADVISER shortly after a business trip in the Middle East and Asia). That demeanor may also come from his personal history of joining Principal in 1984 as an insurance sales representative. Or, it could be Houston’s practice of joining his teams for client meetings, both large and small.

“I think the worst thing you could ever do as a CEO is be holed up in an office and not get out and get your chops busted from time-to-time,” Houston said. “You need to see what your professionals are up against and what the real issues are out there.”

Whatever the reason, Houston’s approach has kept him at the helm as Principal has taken on a dogged push in recent years to focus on three core pillars: asset management, group insurance, and retirement investing services.

In June 2021, the company announced the results of a strategic review in part due to a “cooperation agreement” from its largest investor, the activist shareholder Elliott Investment Management. That review resulted in the company focusing on its “higher-growth retirement, global asset management and U.S. benefits protection businesses,” according to a release at the time. The firm also stopped sales of its U.S. retail fixed annuities and consumer life insurance products.

Since then, Principal has unloaded some of that life insurance business—parts of which Houston had cut his teeth on nearly forty years ago—rebranded its asset management arm with an announcement on the Nasdaq stock exchange, and most recently folded its international pension businesses into asset management.

“We’re a big asset manager around the world in retirement plans that have nothing to do with recordkeeping,” Houston said.

Rupiah Management

That most recent move is part of a decade-long shift in the so-called emerging markets where Principal operates, Houston explained.

One part of the transition was that many countries that had once only allowed for local investments in retirement plans started to allow offshore options. A second factor, Houston said, was that participants —who had long seen investing in compulsory retirement plans as something of a tax that may not return to them—began to see the retirement vehicle more like a 401(k) plan in the U.S. that they could have later in life. Finally, many countries started to offer wraparound products to the state-required programs, so participants could voluntarily make “top-up” investments.

“Now fast forward to today,” Houston said. “In a compulsory system it’s one size fits all—it’s really hard to differentiate yourself. So where does the differentiation come from? Asset management.”

Houston said the international asset management shift announced this February is “all about framing it in a way that when we go to market in Chile, Mexico, Brazil, Hong Kong, Malaysia, Thailand, Indonesia … it’s coming with the full force of here’s a global asset manager.”

“And by the way,” he added, “we also provide recordkeeping administration, compliance, testing, and participant services—but in those compulsory models, they look a lot alike.”

In the U.S., Too

In the U.S., where Principal does recordkeeping for over 12 million participants, the story is somewhat similar in terms of providing asset management and investing services to retirement savers, according to Houston.

In the U.S., the industry “fell into a bit of a view that the retirement business is recordkeeping. But it’s not really,” he said. “What is it really about? It’s about managing assets. That’s the jet fuel for the company.”

Principal does as much DC investment-only business as it does full recordkeeping, Houston noted. That includes offerings such as a target date option, a mid-cap option, a small-cap option, and a fixed income option for qualified retirement plans, and separately, investment sleeves on large platforms for co-mingled investments.

“Retirement too conveniently gets shrouded in ‘they’re the recordkeeper,’” Houston said. “When we think about retirement, we think about how we provide products that are appropriate for a qualified retirement plan, long-dated, that preserve capital. If you look at our $600 billion-plus in assets under management, and $1.5 trillion under custody, they are tied to retirement in some form—most of it ERISA.”

Decumulation

While Houston feels Principal is well poised for the retirement accumulation stage, he said the company is also focused along with the rest of the industry on how to better solve for decumulation. In that case, he sees the market continuing to move toward institutionally-priced, in-plan annuities that provide a guaranteed paycheck in retirement.

He agreed that this in-plan option needs time before being put to mass use. But he noted that, today, the investment options in qualified retirement plans are vetted by trustees in the plan, as well as a third-party provider, and that overall there is a rigorous process involved.

“If you think about it, you’ll have to have that same sort of mechanism and process in place for in-plan annuities,” he said. “So I think we’re going to end up competing there with an institutionally placed product … it will take time, but that is where I think things are going.”

Houston sees retirement income management continuing to evolve in coming years in part because during those client meetings he attends, “the topic of conversation around financial security and retirement is always there,” he said. “You can’t get away from it.”

Currently, Principal oversees 45,000 client plans and has more than 155,000 small and medium sized business relationships through other employer services. Houston says those clients, while being served by different touchpoints, are all connected in some way to asset management.

“We’ve never been a monoline business,” he said. “There’s a lot of overlap of our small-to-medium sized business that has both retirement planning and benefits. We have the largest practice of ESOPs because we’re in the retirement business. We’re the largest player in the nonqualified deferred compensation space, why? Because we’re in the retirement business. We’re the largest administrator of defined benefit plans, why? Because we’re in the retirement business. And we’re in the asset management business because every one of those businesses needs asset management.”