Markets nip record-keeper assets as participants rise

A weakened equity market and a fixed-income market pummeled by rising interest rates led to declining assets under administration for most defined contribution record keepers for the 12 months ended Sept. 30, according to Pensions & Investments' annual survey of record keepers.

At the same time, however, most record keepers reported an increase in participants covered by their services over the 12-month period.

DC consultants and record keepers credited acquisitions, auto enrollment and greater education to convince more participants to save as bright spots in an otherwise difficult year.

Record keepers' assets under administration were hit just like participants' retirement accounts were hit.

"Like everyone else, we are subject to what happens in the market," said Teresa Hassara, senior vice president, workplace savings and retirement solutions for Principal Financial Group, Des Moines, Iowa, whose firm's assets under administration declined 14.8% to $382.7 billion.

"Market performance is the driver," said Jana Steele, a Chicago-based senior vice president and DC consultant for Callan LLC. "We haven't seen any changes in participants' behavior. They are still saving."

Aggregate record-keeping assets dropped 9.7% to $8.75 trillion for the 12 months ended Sept. 30 vs. the year-ago period. The $9.7 trillion total a year earlier was a record for the P&I survey.

However, the latest results require a statistical asterisk due to the big gain by Alight Inc., Lincolnshire, Ill., whose AUA jumped to $1.16 trillion from $544.6 billion, up 113%.

The reason: Alight is the subcontractor to Accenture Federal Services, which won the record-keeping and administrative services contract for the $725.9 billion federal Thrift Savings Plan, Washington. The deal was announced in November 2020; Alight began providing services during the second quarter of 2022.

The Thrift Savings Plan's former record keeper, Science Applications International Corp., provides technology services to various government defense and civilian agencies. It isn't a traditional defined contribution record keeper, and its services have never been part of the P&I database.

The Thrift Savings Plan contract enabled Alight to jump to second place, up from fifth place in the year-ago survey.

Fidelity Investments remained solidly in first place with $2.66 trillion in AUA, down 16.1% from $3.17 trillion.

Fidelity also remained well atop rivals when it came to the number of participants, with 29.9 million, up 7.9% from 27.7 million.

Empower Retirement stayed in second place with 16.6 million participants, up 36.1% from 12.2 million. Empower's results were enhanced by its acquisition of the record-keeping business of Prudential Financial, a deal that closed in April 2022.

When the deal was announced in July 2021, Prudential had more than 4,000 sponsor clients, $314 billion in assets and approximately 4 million participants.

The Prudential acquisition also helped Empower produce a gain in aggregate AUA, to $1.15 trillion from $1.05 trillion, up 9.5%. Empower, which placed second in the year-ago survey of AUA, was third in the latest survey behind Fidelity and Alight.

The Thrift Savings Plan contract also helped propel Alight into third place from seventh for the number of participants, advancing 161% to 11.7 million.

The industry aggregate for record-kept participants rose 10% in the latest survey with 120.1 million vs. 109.1 million for the year-ago survey.

There are several reasons for this participant growth even during economic uncertainty.

When record keeper A is acquired by record keeper B, the clients of record keeper A may simply make the switch. However, others may conduct RFPs to hire a different record keeper, said Michael Volo, the Boston-based principal for CAPTRUST Financial Advisors. Existing record keepers also build up their participant counts as sponsor clients emphasize auto enrollment and internal communications to convince more employees to participate, he said.

Aside from its Prudential acquisition, "we are growing at the expense of others," said Edmund F. Murphy III, president and CEO of Empower Annuity Insurance Company of America, Greenwood Village, Colo.

Empower Retirement has had strong organic growth – 5% per year for eight years. "Growth through acquisitions has added to that," he said.

Ms. Hassara of Principal said her company's gains are primarily due to expanding participation among existing clients but also due to delayed retirements as well as adding new plans.

Some participants "on the verge of retiring" may have decided against leaving the workforce for a year or two because of the "challenging market," she added.

The number of Principal's record-kept participants rose 5.5% to 10.95 million.

Vanguard Group Inc., Malvern, Pa. found that even though the average retirement account balance fell 20% last year, participants displayed a "resilience" in managing their retirement money, said Amber Brestowski, principal and head of institutional investor advice and client service. Vanguard's AUA dropped 18.8% to $569.3 billion, but its number of record-kept participants rose 5.2% to 5.74 million.

Seventy-nine percent of participants maintained what Vanguard considers an age-appropriate balanced investment strategy, according to internal research. They didn't jump into extreme investing such as too much fixed income or too much equity — or stop contributing, she said.

Among participants not using Vanguard's advice services, only 6% traded on their accounts last year — the lowest in 20 years. "Nearly 40% of participants increased their deferral rate," said Ms. Brestowski, reflecting automatic annual increases or individual decisions.

"We've seen this trend remain consistent over the past four years, even through COVID," she said. "The data isn't unusual, but it's surprising given 2022's economic headwinds."

As record keepers try to protect their turf and expand their influence, retirement-income services, such as in-plan annuities, primarily remain an unknown — or untapped — prospect.

"Until annuities can be effectively implemented in a QDIA solution, there won't be the pick-up that the industry desires," said Mr. Volo of CAPTRUST.

The hurdles are a combination of participant interest, sponsor willingness, cost, product complexity and record-keeper platform technology.

"From a pricing standpoint, it's not there yet," said Gregg Levinson, a Philadelphia-based senior director for Willis Towers Watson PLC.

Portability remains a big issue, he said. What happens if a sponsor decides to change from a record keeper that has an annuity technology platform to another that lacks a platform or has a different type of platform? "Portability makes it complicated to put in the plan," he said.

Consultant Sean McCaffery cited portability, complexity and fees as the key stumbling blocks to wider acceptance. For now, the record keepers' strategy is to offer a platform for annuities as a service to existing clients rather than as a lure for new clients, said Mr. McCaffery, senior DC research specialist at Fiducient Advisors, Windsor, Conn. Annuities are "not a silver bullet" for retirement income, he said.

Principal launched its Principal Pension Builder in 2015 as a stand-alone annuity option within a DC plan. "We have found most stand-alone investment options typically have modest adoption rates," Ms. Hassara said. "However, we believe right now is an attractive time for plan sponsors to be looking a solution like Principal Pension Builder for their participants since high interest rates create a favorable environment for annuities."

The in-plan annuity industry "is still in its infancy," said Ms. Hassara, adding that providers must do more than offer a product. "They have to captivate sponsors, consultants and participants and make it as simple as possible," she said.

Distinguishing between a sponsor who says "yes" to an in-plan annuity and a sponsor who says "no," Ms. Hassara said the former "looks across the whole spectrum of their workforce" to assess participants' needs, which requires extensive and continuing education.

Vanguard eschews in-plan annuities in favor of offering a third-party service that acts as a marketplace for individual participants to choose an institutionally priced out-of-plan annuity.

"We have seen some interest in annuities, but we see more interest in advice at the time of retirement," Vanguard's Ms. Brestowski said. "Some participants will feel peace of mind with an annuity. For us, it's providing a spectrum of solutions."

Voya Financial Inc. divested "substantially all of its variable, fixed and fixed indexed annuities in 2018," so it doesn't offer its own annuities, said Jeff Cimini, the Windsor, Conn.-based senior vice president, workplace pricing and profitability.

Voya believes "there is no one-size-fits-all approach" to lifetime income strategies, he said. "Employers should consider providing several solutions to meet the diverse needs of their employees or start with a simple solution and evolve options and a default solution over time."

Voya offers options such as systematic, automated withdrawals; partial distributions; managed accounts; other firms' annuities; and managed payout funds. It also offers a QDIA that defaults participants age 50 and older into "managed accounts, or similar, that will help support their transition from accumulation to drawdown," he said.

Voya's AUA dropped 13.5% to $431.7 billion. The number of record-kept participants rose 3.9% to 6.57 million.

Empower takes an open architecture approach to in-plan annuities and other retirement income options, holding about $4 billion on its record-keeping platform, Mr. Murphy explained. The company is working on a "slate of new products" with various partners — he didn't provide details — which will be unveiled later this year.

"Complex products and fiduciary concerns have all been barriers to greater adoption," he said. "Because of this, we are going to offer retirement income solutions with an advice component."