Are You Prepared For Industry Compression?

By Peter Preovolos


In case you haven’t noticed, the retirement plan third-party administrator (TPA) industry is shrinking. In the past 10 years, the number of TPA providers serving the market has significantly declined as the smaller firms either voluntarily exit the space or get driven out by larger, more scale-efficient competitors. There are three primary factors driving this cycle of compression:

  • Fee pressures: Recent Department of Labor (DOL) regulations regarding fee disclosures are contributing to the downward pressures on TPA service fees, and therefore lower margins.
  • Mergers and acquisitions: M&A activity in the industry has heated up, and shows no signs of slowing down.
  • Economies of scale: As the largest institutional players get even bigger and more efficient, they can afford to lower prices for plan administrative services by driving plan sponsors into “one size fits most” models.

A Time of Threat….and Opportunity

As the industry continues to compress, TPAs will face increasing pressure from institutions that can provide record keeping and plan administrative services at lower prices. Instead of competing primarily with each other, TPAs will increasingly be forced to go up against large record keepers who can also bring economies of scale to third-party administration.

As administrative fees fall even lower, larger record keepers may also enjoy the advantage of using them as a “loss leader” to win new business. For example, if a plan sponsor signs up for record keeping, custodial and investment management services, large record keepers may include plan administration services at reduced or possibly even no cost.

Not a very rosy outlook for many TPAs – especially for smaller ones trying to figure out how to compete in this changing marketplace. But it also brings to mind the old saying that crisis is often an opportunity in disguise.

What Can TPAs Do?

In response to these trends, there are at least three key strategies that TPAs can employ to still thrive:

  • Refocus. Some TPAs may decide they no longer want to serve larger plans. Others may choose a narrower target market by focusing on a specific type of plan sponsor, such as professional practice groups.
  • Merge or acquire. Combining resources, expertise and customer bases can enable smaller companies to achieve the economies of scale needed to survive the industry transition.
  • Differentiate by service, not price. In a mature industry, companies can compete on price or service, but not usually both, or at least not equally well. For smaller TPAs, this means focusing on personalized service that larger, less agile companies can’t provide. This could include promoting staff to acquire specific industry education and technical certifications as well as leveraging software and outsourced solutions to expand service capabilities.

Most retirement plans in the U.S. are held by small to mid-sized companies. Lacking internal plan administration skill and resources, many of these plan sponsors will continue to need the expertise TPAs can offer to truly get the most out of their plans. For smaller TPAs, the key to survival may hinge upon delivering a high level of personalized services to those plans.

Where Does the Industry Go From Here?

Currently, all signs point to continued compression within the industry. As a result, TPA companies will need to pursue greater economies of scale to overcome shrinking margins. This will drive more M&A activity, which will continue to put pressure on fees. As costs go up and fees go down, some companies may be forced to cut services, offering their customers fewer choices.

And that’s where the opportunity may lie for independent TPAs. Through ongoing innovation of products and services combined with exceptional customer service, smaller TPA firms may be able to carve out specialized niches where customers truly value their specialized services.

For some TPAs (large or small), the best solution may be to leverage outsourced solutions to fortify their position in the market and strengthen their relationships with customers through improved service.

Either way, the time is now for independent TPAs to start planning ahead in order to retain control of their own destinies. Otherwise, industry compression may ultimately decide their futures for them.

About the Author:

Peter E. Preovolos is CEO of PenChecks Trust, a 20-year provider of distribution services and unique solutions to the retirement plan industry.  PenChecks Trust has been a leading innovator in developing commercial-scale, compliant solutions for missing participants and uncashed checks. PenChecks Trust helps institutions, administrators, advisors and plan sponsors save time, reduce risk and eliminate costs. Peter can be reached at

Photo by Roland O’Daniel via Flickr CC License


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