The third party administration (TPA) business is the Rodney Dangerfield of the retirement plan industry, they don’t get any respect. TPAs do the bulk of the work and get all of the blame if things go bad and none of the credit when things go well. What is added to this burden is the onset of fee disclosure regulations that will add more pressure to their narrow profit margins.
While I can’t fully predict what will happen to the retirement plan industry after fee disclosure on July 1, I am sure that there will be providers exiting the business. Some TPAs will benefit from fee disclosure and others who hid fees or lived off not disclosing revenue sharing will suffer in a transparent industry. In addition, TPAs who fully disclosed revenue sharing before it was fashionable may be under stress because it is likely that revenue sharing payments may be cut by mutual fund companies as they may be under pressure from market share growth from exchange traded funds and index mutual funds.
So even before fee disclosure is implemented, we already have the first casualty of the large plan providers. Hartford Insurance announced that will seek a buyer for their retirement plan business. While the decision to sell the business can be traced to their heavy losses in equity-linked variable annuities led to a taxpayer bailout in 2009. While shareholder John Paulson of Paulson & Co. is demanding that Hartford shrink its size to maximize shareholder value, the decision to sell the retirement plan business is pretty clear. The retirement plan business is not considered by Hartford to be a huge growth business. If it was, they would keep it. Let’s face it; fee disclosure isn’t going to help the retirement plan operation’s growth.
Hartford said it will stop selling individual annuities and will seek buyers for its individual-life, Woodbury Financial Services and retirement-plan operations. Hartford will maintain property and casualty, group benefits and mutual funds as well as liabilities tied to annuities.
So even before July 1, one major provider sees the signs. Who will see it next?