Client continues to focus on asset management, the company’s “jet fuel”.
Dan Houston is the CEO of a $17.5 billion global company. He’s also the kind of CEO who casually hands out his business card after an interview, as if you could call him later to discuss what pension to recommend to your aging cousin.
Houston’s easy-going demeanor may derive in part from Principal Financial Group roots in Des Moines, Iowa (although he met PLANADVISER shortly after a business trip in the Middle East and Asia). This behavior may also stem from his personal history of joining Principal in 1984 as an insurance agent. Or it could be Houston’s practice to join his teams for client meetings large and small.
“I think the worst thing you can do as a CEO is hide in an office and not come out and bust your chops from time to time,” Houston said. “You need to see what your professionals are facing and what the real problems are out there.”
Whatever the reason, Houston’s approach has kept him at the forefront as the client has made a stubborn push in recent years to focus on three core pillars: wealth management, group insurance, and retirement services.
In June 2021, the company announced the results of a strategic review, driven in part by a “collaboration agreement” by its largest investor, activist shareholder Elliott Investment Management. That review led the company to focus on its “higher-growth retirement, global wealth management and U.S. benefit protection businesses,” according to a press release at the time. The company also halted sales of its U.S. retail fixed annuity and consumer life insurance products.
Principal has since divested part of that life insurance business — parts of which Houston cut his teeth on nearly forty years ago — rebranded its wealth management arm with an announcement on the Nasdaq stock exchange, and most recently merged its international pensions business into wealth management.
“We’re a big money manager around the world with pension plans that have nothing to do with records,” Houston said.
This latest move is part of a decade-long shift in the so-called emerging markets where Principal operates, Houston said.
Part of the transition was that many countries that previously only allowed local investment in retirement plans began to allow offshore options. A second factor, Houston said, was that participants — who had long viewed investing in mandatory retirement plans as a type of tax that they may not be reimbursed — were beginning to view the retirement vehicle more like a 401(k) plan in the United States see they might have later in life. Eventually, many countries began offering all-in-one products for the government-mandated programs so participants could voluntarily make “top-up” investments.
“Now, fast forward to today,” Houston said. “In a mandatory system, there is one size fits all – it’s really hard to stand out. So where does the differentiation come from? wealth management.”
Houston said the international wealth management shift announced in February “is all about designing it so that when we go out in Chile, Mexico, Brazil, Hong Kong, Malaysia, Thailand, Indonesia … it’s going to be full force.” global wealth manager comes from here.”
“And by the way,” he added, “we also offer records management, compliance, testing and subscriber services – but in these mandatory models they look very similar.”
In the US too
In the US, where Principal maintains records for over 12 million subscribers, the story is somewhat similar in terms of providing wealth management and investment services to retirement savers, Houston said.
In the US, the industry “got a bit of the notion that the annuity business keeps records. But it’s not really,” he said. “What is it actually about? It’s about wealth management. This is the jet fuel for the company.”
The principal does as much pure DC investment business as it does full record keeping, Houston noted. These include offerings such as a target date option, a mid-cap option, a small-cap option and a fixed-income option for qualifying retirement plans, as well as separate investment shells on major blended investment platforms.
“Retirement is all too conveniently wrapped in ‘you’re the record holder,'” Houston said. “When we think about retirement, we think about how we offer products that are eligible for a qualifying long-term retirement plan and preserve capital. If you look at our over $600 billion in assets under management and $1.5 billion in assets under custody, they’re bound by some form of retirement – most of it ERISA.”
While Houston believes Principal is well-positioned for the accumulation phase of retirement, the company, along with the rest of the industry, is also focused on how to better resolve decumulation. In this case, he sees the market continuing to move towards institutionally priced scheduled annuities that offer a guaranteed paycheck in retirement.
He agreed that this planned option will need time before it is used en masse. However, he noted that investment opportunities in qualifying retirement plans are now reviewed by the plan’s trustees as well as a third party and that a rigorous process is required overall.
“If you think about it, you need to have the same kind of mechanism and process for scheduled annuities,” he said. “So I think we’re going to end up competing there with an institutionally placed product … it’s going to take time, but I think things are going there.”
Houston anticipates that retirement management will continue to evolve in the years to come, in part because during the client meetings he attends, “the talk of financial security and retirement is always there,” he said. “You can’t escape it.”
Principal currently serves 45,000 client plans and has more than 155,000 small and medium business relationships through other employer services. Houston says that while these clients are served from different touchpoints, they are all connected to wealth management in some way.
“We were never a monoline company,” he said. “There’s a lot of overlap with our small to medium-sized businesses that offer both retirement plans and benefits. We have the largest ESOP practice because we are in the annuity business. Why are we the largest player in nonqualifying deferred compensation? Because we are in the pension business. We are the largest administrator of defined benefit plans, why? Because we are in the pension business. And we’re in the asset management business because each of these companies needs asset management.”