Tough choice: outsource tech or upgrade

Last year, it was Vanguard Group Inc.

Last month, it was T. Rowe Price Group Inc.

When it comes to big record keepers outsourcing technology management, defined contribution consultants, industry members and researchers won't speculate on the next candidate, but they agree record keepers are being forced to make decisions based on the need and cost of upgrading their technology.

"It makes perfect sense because organizations are looking at significant investments in technology," said Lew Minsky, the Palm Beach Gardens, Fla.-based president and CEO of the Defined Contribution Institutional Investment Association. "Everybody has the same set of considerations."

Some giant record keepers will fortify their existing technology; some will outsource. Some companies will sell their record-keeping business, deciding that the cost of upgrading is too great in an industry characterized by continuous profit-margin pressures.

"Record keeping has always been a technology-heavy business," said Ross Bremen, a partner at consultant NEPC LLC, Boston.

"They always have to make substantial investments in their technology," Mr. Bremen said, noting that rising costs reflect the evolution of technology from mainframes to servers to cloud computing. "The world is becoming more 'I want it in the next five minutes' rather than how it used to be."

The cost of technology is only part of record keepers' calculations for sustaining profitability.

Sponsors continue to demand lower fees. Litigation risk and plan design changes mean traditional income sources may not be as plentiful for record keepers as in the past, such as offering proprietary investments or revenue-sharing to sponsors.

"Because of open architecture, there's a lot more pressure to offer solutions without (offering) proprietary assets," Mr. Bremen said.

"If they don't have the opportunity to earn revenue from their proprietary products, they have to find other sources of revenue," he said.

Otherwise, they "have to go in another direction," which means reducing their costs without reducing their services to the ever-increasing demands from sponsors, he said.

The need for greater investments in technology influences companies considering the sale of their record-keeping business.

Although a seller's formal news release often says the sale was done because record keeping was no longer a strategic fit, technology plays "a much larger role" than the official announcements describe, said Leslie Smith, a Somerset, N.J.-based partner for Aon PLC.

"There needs to be a large commitment" to spending on technology upgrades, Ms. Smith said. If record keeping isn't a core business to a company, the expense plus the general pressures of record keeping will convince them to sell, she added.

Technology has been a "behind-the-scenes" contributor to companies selling record-keeping businesses, said Amy Reynolds, a Richmond, Va.-based partner for Mercer LLC. "Providers need to be more nimble," Ms. Reynolds said. "Some of the legacy (technology) processes are slower and aren't as nimble," creating a dilemma for companies that realize they must invest more to compete and provide additional services.

"We are not sure who may be next, but I would imagine other record keepers are exploring this as a possible solution since two of the nation's largest have moved in what appears to be a similar direction," said Peter Nadeau, Windsor, Conn.-based partner and senior consultant at Fiducient Advisors, in an email.

"I would imagine that this is not the last time we will hear about a record keeper leveraging outside partnerships to help make them become more viable in an ultracompetitive marketplace," Mr. Nadeau added.

Vanguard ranked fourth in record-keeping assets ($592.7 billion) as of Sept. 30, according to the latest Pensions & Investments data. T. Rowe Price ($219.2 billion) was 10th.

Last month, T. Rowe Price, Baltimore, described its technology outsourcing strategy as a way to deliver its services to sponsors and participants "at an accelerated rate."

Effective Aug. 1, the firm will transfer responsibility for its retirement technology development and core operations to Fidelity National Information Services Inc., Jacksonville, Fla., which has provided T. Rowe Price's defined contribution record-keeping platform for 30 years. About 800 T. Rowe Price employees, or 10% of the company workforce, have been offered the same technology and operations roles with Fidelity National Information Services.

Eleven months ago, Vanguard Group, Malvern, Pa., said Infosys Ltd. would assume daily technology operations for record keeping. Vanguard described the agreement as enabling clients to benefit from lower costs and improved services thanks to the Infosys technology. The transition, which took effect in mid-October, also resulted in about 1,300 Vanguard employees moving to Infosys.

Technology also plays an important role in services provided by record keepers that don't immediately affect their bottom lines but have become more desired by clients that want more than traditional retirement savings management. Interactive tools for budgeting, health savings accounts, emergency savings programs, student loan services and other services are becoming more commonplace.

"There's always a keeping-up-with-the Jones discussion due to the convergence of health, wealth and retirement," said David Levine, principal and co-chairman of the plan sponsor practice at Groom Law Group, Washington. "It requires more technology."

Technological improvements "will drive more enhancements to participants," Mercer's Ms. Reynolds said. In the short term, however, "there's no indication it will drive savings to sponsors and participants."

Other needs for improved technology spending include greater cybersecurity protection, more efficient payroll management, data-driven portfolio management and financial advice, said a December 2019 report by Cerulli Associates, whose theme for record keepers was "get big or get smart."

Another motivation for record keepers seeking enhanced technology is the trend toward greater personalization and customization of retirement services for sponsors, said Shawn O'Brien, Boston-based senior analyst for retirement at Cerulli.

"They want to be engaging more with sponsors," Mr. O'Brien said. For technology improvements, "they can offload it to someone who can do it better."