Is Consolidation in the Retirement Plan Market Hurting your 401(k)?

As large companies acquire smaller competitors and consolidate, the retirement market will feel the effects, both positive and negative. Sometimes consolidation can lead to increased efficiency and cost savings, if the larger companies choose to combine operations and eliminate duplicate functions. In theory this could lead to increased innovation, as the larger company may be better able to invest in research and development. In reality, however, the retirement industry could suffer when all of the specialized TPAs, auditors, and financial advisors are consolidated under a large corporate umbrella.

Taking a closer look at what has happened as the retirement plan industry has been swept up by acquisitions and mergers, we see why an industry that serves a diverse market of companies has seen an increase in cost and a drop in service levels.

Reduced competition = Higher prices

When consolidation occurs, the market becomes less competitive, which leads to higher prices. This is because with fewer companies competing for customers, there is less pressure to keep prices low in order to attract and retain business. In addition, larger companies may have more market power and be able to set prices at a level that is higher than would be possible in a more competitive market.

Lost jobs in the name of “streamlining”

Consolidation frequently leads to job losses as the larger company streamlines its operations. Streamlining is a process where a company seeks efficiency, waste reduction, and less redundancy. To save money, consolidated companies will cut jobs in order to reduce costs. This can lead to layoffs as the organization seeks to eliminate positions they believe are no longer necessary. It's important to note that not all streamlining efforts result in layoffs, but it is a potential outcome of the process.

Drops in service levels

Streamlining rarely has the goal of increasing value to the customer, improving customer service levels, or building client relationships. With fewer competitors, companies are less likely to invest in improving their service levels in order to differentiate themselves from their rivals. This can result in lower service levels overall, as there is less pressure on companies to provide a high level of service in order to attract and retain customers.

Loss of innovation and creative problem solving

Another unintended consequence of consolidation is the disincentivization of innovation and loss of creative solutions. can lead to reduced innovation and choice for consumers, which can impact service levels. As there are fewer companies competing to offer improved 401(k) services and expertise. Companies and financial advisors have fewer options to choose from and are forced to accept lower-quality service.

The retirement plan industry needs specialists and high-touch experts

Overall, the effects of consolidation can be complex and vary depending on the specific situation. In a complex retirement solutions industry, these effects are worse and could mean the difference of hundreds of thousands of dollars in a company’s 401(k). The Ryding Company works hard to give our clients more than they can get from the big players in the market. We’d love to talk to you about our services!

This information is provided as general guidance and may be affected by changes in law or regulation. It is not intended as accounting or legal advice. If you have questions please reach out to our team.