Aon-Willis Merger Would Dominate Outsourced Investment Services

The proposed $30 billion merger of insurance brokerage giants Aon Plc and Willis Towers Watson Plc would create the world’s largest outsourced investment management firm.

Critics worry the giant companies taking over outsourced responsibilities are too big to effectively manage individual investors and that many employers are too small to adequately keep those firms in check. The U.S. Justice Department’s antitrust division filed a lawsuit last week to block the tie-up, saying it wanted to preserve competition among the brokerages that benefits Americans.

The two brokerages are global leaders in the emerging market for outsourced chief investment officers, or OCIOs, a growing segment of the retirement money manager market where complete or partial control of a plan’s investment strategy is provided by another company. Their merger would overtake Marsh & McLennan Co. subsidiary Mercer LLC to create the world’s largest OCIO service provider, with 10% control of that market and $300 billion of assets under management, according to industry estimates.

“The numbers to make these kinds of mergers work have to be so big that it’s not really possible to think about an individual participant and their financial wellbeing,” said Greg Kasten, founder and CEO of Unified Trust Co., a discretionary advisory firm in Lexington, Ky.

Aon and Willis Towers Watson declined to comment on the record for this story.

OCIOs can do business for nonprofit trusts and health-care systems as well as other traditional institutional investors, but they take on extra significance in the field of pensions and 401(k)s due to fiduciary duties outlined under the Employee Retirement Income Security Act of 1974, which is administered by the U.S. Labor Department.

Outsourcing has become more popular as many employers seek ways to shed fiduciary responsibilities for retirement benefit plans—duties that carry personal responsibility for the well-being of worker and retiree investments.

The Justice Department cited the firms’ actuarial service businesses for large, single-employer traditional pension plans as evidence of the deal’s anticompetitive nature. The companies hold a combined 60% market share of defined-benefit assets and help those plans “meet obligations to pensioners and assist pension plans with required reporting to federal regulators,” according to the department’s complaint.

“The proposed Merger would eliminate competition between Aon and WTW and leave these plans with few competitive options,” the DOJ said in its filing.

In anticipation of the antitrust suit, Aon earlier this month sold off much of its U.S. retirement business to Aquiline Capital Partners LLC and its employer health exchange to Alight Solutions LLC in a deal worth roughly $1.4 billion. But the company held on to its outsourced chief investment officer and non-discretionary asset management businesses.

Mergers are a growing trend in the retirement investment advisory space, said Max Schatzow, an associate at Stark & Stark PC in Lawrenceville, N.J. An aging boomer population that started small-to-mid-market firms are taking advantage of higher-than-average valuations and an expected regulatory upheaval related to the fiduciary rule, which the Biden DOL has promised to address.

“What we’ve seen in the legal and accounting industry has made it to the financial advisers,” Schatzow said. “I think it will follow a natural cycle of growth until firms reach a size that people peel off individual ventures.”