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Possible Wells Fargo deal could extend Principal's reach in 401(k) market

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Possible Wells Fargo deal could extend Principal's reach in 401(k) market

Principal Financial Group Inc. may be nearing one of its largest acquisitions ever as it ramps up the hunt for scale in the retirement plan marketplace.

The Des Moines, Iowa-based life insurer is reportedly close to acquiring Wells Fargo & Co.'s retirement plan services unit in a deal that could surpass $1 billion, which would make it one of Principal's largest purchases of all time. Such a deal, if finalized, could also bring the added scale that Principal executives have hinted the company has been in pursuit of for several months now.

"We're still growing that business at a significant rate, but the assets come at a lower fee level," Principal CFO Deanna Strable-Soethout said during a Feb. 13 industry conference. "You need to be scaled, you need to be able to manage your expenses."

Retirement plan providers like Principal have faced continued pressure from their customers in recent years to slash fees and build out technology offerings. Those demands have forced companies to seek out ways to scale their businesses up as they look to compete with big-name defined contribution record-keepers like Fidelity Investments, Vanguard Group Inc. and Voya Financial Inc.

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Principal has managed to grow out its retirement plan assets, including its 401(k) business, primarily through organic measures, analysts said. At the end of 2018, the company had $206.4 billion in retirement plan assets, up 31% from the end of 2013, according to company filings.

Wells Fargo's retirement unit has approximately $364 billion in institutional retirement assets. A deal stands to more than double Principal's retirement assets and to provide the company with the wider base that plan providers deem a necessity in today's market dynamics.

"It stands to reason that bigger size [and] bigger scale are going to be increasingly important to manage those pressure points," UBS analyst John Nadel said in an interview.

Principal's executive team has signaled in recent months that it would be open to looking at potential deals. In January, Nora Everett, the company's now-former president of retirement and income solutions, said Principal was in "a nice position" to potentially pursue competitors who may be looking to exit the business within the next one to two years because they do not have the scale needed to compete. The following month, Strable-Soethout said part of the $1.4 billion that Principal has allocated for capital deployment in 2019 could be used for M&A.

While Wells Fargo may not lack scale in the retirement plan business, the San Francisco-based bank could be looking to exit it as it deals with growth restrictions imposed by the U.S. Federal Reserve in February 2018. If Wells agrees to sell off its retirement unit, the sale would mark the 16th divestiture the bank has made since 2016, when a scandal broke about the bank's employees secretly opening up deposit and credit card accounts without customer permission.

Spokespersons for Principal and Wells Fargo said that their respective companies do not comment on market speculation or rumors.

The still-unconfirmed merger talks could also provide Principal with an additional product set to cross-sell between its insurance and asset management clients. Asset management has become an increasingly important part of the company's business, with its Principal Global Investors unit accounting for more than a quarter of its total segment pretax operating earnings at the end of 2018.

Most of Principal's M&A efforts in recent years have focused on expanding in international markets, with deals to buy Axa's Hong Kong pension business and MetLife's pension fund management business in Mexico. But a deal for Wells Fargo's retirement business would likely represent Principal's largest purchase since its 2013 acquisition of Chilean pension manager AFP Cuprum SA and could refocus the insurer back on growing in the U.S. marketplace.

"This is a big deal," said Sandler O'Neill analyst John Barnidge in an interview. "It would make sense that they would turn domestic and grow that as well, opportunistically."

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