Principal continues to focus on asset management, the company’s “jet fuel”
Dan Houston is the head of a $17.5 billion global business. He’s also the kind of CEO who, after an interview, casually hands over his business card as if you could call him later to discuss which annuity to recommend to your aging cousin.
Houston’s relaxed manner may stem in part from Principal Financial Group’s roots in Des Moines, Iowa (though he’s fair, he met PLANADVISER shortly after a business trip to the Middle East and Asia). This behavior may also stem from his personal history when he joined Principal in 1984 as an insurance sales representative. Or, it could be Houston’s practice of joining its teams for meetings with clients big and small.
“I think the worst thing you can do as a CEO is lock yourself in an office and not come out and have your chops busted once in a while,” Houston said. “You need to see what your professionals are up against and what the real issues are.”
Whatever the reason, Houston’s approach has kept him at the helm, as Principal has strived in recent years to focus on three fundamental pillars: asset management, group insurance and investment services for retirement.
In June 2021, the company announced the results of a strategic review in part thanks to a “cooperation agreement” from its largest investor, activist shareholder Elliott Investment Management. That review led the company to focus on its “highest-growth retirement, global asset management and U.S. benefits protection businesses,” according to a statement at the time. The company also halted sales of its consumer fixed annuity and life insurance products in the United States.
Since then, Principal has offloaded some of that life insurance business – which Houston cut its teeth on nearly forty years ago – rebranded its asset management arm with a Nasdaq stock market listing. and more recently merged its international pension business into asset management.
“We’re a big asset manager around the world in pension plans that have nothing to do with record keeping,” Houston said.
This most recent move is part of a decade-long shift in the so-called emerging markets where Principal operates, Houston explained.
Part of the transition has been that many countries that once only allowed local investments in pension plans have started to allow offshore options. A second factor, Houston said, was that plan members — who had long viewed investing in mandatory retirement plans as a sort of tax that might not be theirs — began to view the retirement vehicle more like a 401(k) plan in the US that they might have later in life. Finally, many countries have begun to offer complementary products to state-required programs, so participants can voluntarily make “add-on” investments.
“Now fast forward to today,” Houston said. “In a mandatory system, there’s only one solution – it’s really hard to differentiate. So where does the differentiation come from? Asset Management.”
Houston said the international asset management change announced in February was “to frame it so that when we go to market in Chile, Mexico, Brazil, Hong Kong, Malaysia, Thailand, Indonesia…it happens with all the might here global asset manager.
“And by the way,” he added, “we also provide administration, compliance, testing, and record participation services, but within these mandatory models, they’re very much alike.”
In the United States too
In the United States, where Principal maintains records for more than 12 million participants, the story is somewhat similar in terms of providing asset management and investment services to retirement savers, according to Houston.
In the United States, the industry “has fallen into the idea that the retirement industry is record keeping. But that’s not really the case,” he said. “What is it really about? It’s about managing assets. It’s the fuel of the business.
The principal does as much DC-only investment activity as full record-keeping, Houston noted. This includes offerings such as a target date option, a mid cap option, a small cap option and a fixed income option for qualified retirement plans, and separately, investment pockets on large platforms for combined investments.
“Retirement is all too conveniently wrapped up in ‘they’re the record keeper,'” Houston said. “When we think of retirement, we think of how we offer products suited to a qualified, long-term, capital-preserving retirement plan. If you look at our over $600 billion in assets under management and $1.5 billion in custody, it’s retirement-related in one form or another, most of it being ERISA.
While Houston believes Principal is well positioned for the accumulation stage of retirement, he said the company is also focusing with the rest of the industry on how to better address decumulation. In this case, he sees the market continuing to move toward institutionally priced plan annuities that offer a guaranteed paycheck in retirement.
He agrees that this option in plan needs time before being generalized. But he noted that today qualified pension plan investment options are reviewed by plan trustees, as well as a third-party provider, and overall a rigorous process is involved. .
“If you think about it, you’ll have to put in place the same type of mechanism and process for plan annuities,” he said. “So I think we’re going to end up competing there with an institutionalized product…it’s going to take time, but that’s where I think things are going.”
Houston sees retirement income management continuing to evolve in the years to come, in part because in those client meetings he attends, “the talking point around financial security and retirement is always there.” , did he declare. “You can’t live without it.”
Currently, Principal oversees 45,000 client plans and maintains over 155,000 relationships with small and medium businesses through other employer services. Houston says these customers, while served by different touchpoints, are all connected in some way to asset management.
“We were never a monoline company,” he said. “There is a lot of overlap in our small and medium businesses that have both retirement planning and benefits. We have the largest ESOP practice because we are in the retirement business. We are the largest player in the area of unqualified deferred compensation, why? Because we are in the retirement business. We are the largest administrator of defined benefit plans, why? Because we are in the retirement business. And we’re in the asset management business because every one of these businesses needs asset management.