Consolidation Strikes 401(k) Market Again as Franklin Templeton buys Putnam Investments

All aspects of the defined contribution industry are being affected by consolidation driven by the need for scale, especially record keepers and retirement plan advisors, but also asset managers and broker/dealers. Though the defined contribution business is just a part of asset managers’ and b/d’s businesses, retirement plan assets are coveted and dominated by the largest money managers in the world, leading to the sale of Putnam Investments to Franklin Templeton.

Once a highflier with $371 billion in AUM in 2000, Putnam was hit by the mutual fund scandals as assets dropped to $192 billion in 2007 when it was sold to Great West for $3.9 billion. With growth nonexistent and assets at about $135 billion, the price Franklin paid to the Power Group in Canada and the Desmarais family for Putnam was a reported $925 million with just $100 million in cash plus 6.2% of Franklin Templeton, which had about $1.4 trillion in assets the end of 2022.

Meanwhile, Great West has been doubling down on the DC record keeper business combining their small market group with Putnam’s mid-market 401(k) division soon after Bob Reynolds and Ed Murphy joined Putnam in 2008, eventually acquiring JPMorgan Chase’s large market record keeping group to form Empower Retirement. Along with smaller acquisitions, Empower has gone on a buying spree, acquiring MassMutual’s and Prudential’s record keepers to become the second largest DC provider in the US behind only Fidelity.

Though record keeping is thought to be a low margin business, especially when compared to asset management, it appears Great West sees potential, especially by leveraging their $1 billion acquisition of robo advisor Personal Capital and 20 million DC participants.

Just like MassMutual’s decision to sell their record keeper with no clear path to become a tier 1 provider deciding to focus on annuities, life insurance and their agency reps, Empower has doubled down on record keeping, conceding that their foray into asset management was not what they had expected.

With a healthy stake in Franklin, which will receive $25 billion in asset allocations from Great West as well as special treatment with Empower, Putnam is not really exiting the asset management business, just becoming a stakeholder in a bigger player with infinitely more scale.

Franklin, Putnam and Legg Mason, which Franklin bought a few years ago, held similar positions in the DCIO market – well positioned but without a significant footprint in the three critical areas:

  1. Target date funds
  2. Indexing
  3. Record keeping

Though Putnam’s parent owned Empower, it was not clear = they got special treatment and may have actually been shunned by other record keepers. As active management DC fees continue to decline and the cost of distribution rises, Franklin can flex its muscles while enjoying a honeymoon period and sweetheart relationship with Empower putting pressure on the competition other than the six that dominate the DCIO industry due to their presence in at least one of the three critical areas.

Reynolds, who created and led Fidelity’s DC business, is said to be staying on with Great West to oversee the integration and Franklin’s relationships with Great West and Empower, but doubtful this role will be big enough for him and Murphy’s growing influence and power, whether there is a place for him there.

Advisors and CIOs at record keepers, RPA aggregators and broker/dealers will need to keep a close eye on which portfolio managers depart, requiring extra due diligence. No doubt there will be greater attrition in the operations and distribution groups as cost cutting must have been a big driver in the deal, just as it was with Legg Mason, which could affect many of Putnam’s 1,200 employees, mostly in Boston.

While the DC market is growing and could explode with millions of new plans, the convergence of wealth, retirement and benefits at work, as well as in-plan retirement income that could replace some of the $500 billion that leave DC plans for IRAs, it will take scale, capital, technology and the right people maybe with different vastly skill sets. Only a very few will survive and thrive while others like Putnam, Legg Mason, MassMutual and Prudential, to name just a few, once highfliers in the DC industry, have conceded, focusing on other areas where they have a chance to be more successful. It’s called natural evolution and selection.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.