Pensions & Investments' first ranking of defined contribution service providers shows a market dominated by two players, followed by a pack of vendors running nearly neck-and-neck in terms of market share.
Fidelity Investments, Boston, towered over all other players in P&I's main defined contribution plan provider ranking, based on the total number of participants serviced in bundled and unbundled service categories.
Fidelity handled more than 4 million participants, almost 25% more than its nearest competitor, employee benefits consultant Hewitt Associates L.L.C., Lincolnshire, Ill. Hewitt ranked second with 3.2 million participants in its record keeping and alliance programs.
Fidelity's participant numbers are probably even higher because participants served in investment management-only relationships are not reflected in the 4 million, said a spokeswoman.
The next 11 vendors in the overall ranking range between 1.5 million and 982,000 participants. The Vanguard Group of Investment Cos., Malvern, Pa., and State Street Bank & Trust Co., Boston, tied with 1.5 million participants each for third and fourth place. Merrill Lynch, Pierce, Fenner & Smith Inc., Plainsboro, N.J., followed closely with 1.4 million participants serviced. The Principal Financial Group, Des Moines, Iowa, was sixth with 1.352 million employee investors and Bankers Trust Co., New York, was seventh with 1.3 million.
Among the 79 service providers in the overall ranking (only the top 50 are profiled), 25 are money managers and mutual fund companies, 21 are employee benefit consulting firms, 19 are banks and 14 are insurance companies.
The top five money management firms in the overall ranking of participant numbers were: Fidelity; Vanguard; Merrill Lynch; J.P. Morgan Investment Management Inc., New York; and T. Rowe Price Associates Inc., Baltimore.
The top five banks were State Street Bank; Bankers Trust; Northern Trust Co./Hazlehurst & Associates, Chicago; Chase Manhattan Bank, New York; and BZW Barclays Global Investors - MasterWorks Group, San Francisco.
The top five insurance companies were Principal Financial; CIGNA Retirement & Investment Services, Hartford, Conn.; Aetna Retirement Services, Hartford, Conn.; The Prudential, Moosic, Pa.; and Lincoln National Life Insurance Co., Fort Wayne, Ind.
The employee benefits firms serving the most participants included Hewitt; The Copeland Cos., East Brunswick, N.J.; Kwasha Lipton L.L.C., Fort Lee, N.J.; William M. Mercer Inc., New York; and Watson Wyatt Worldwide, New York.
The overall ranks look much different sorted by the total number of plan sponsors. The insurer, Aetna, tops this data list, serving nearly 28,600 sponsors. Principal Financial follows with 27,100 clients; Zurich Kemper Investments, Chicago, is third on this list with 22,730 sponsors; Fidelity is fourth with 17,319 clients; and Prudential, fifth, with nearly 13,500 clients.
Consultants said sponsors are demanding more investment flexibility from their bundled service providers.
"Plan sponsors have changed their focus. Vendors have been focusing on the bells and whistles of services - record keeping, voice-response systems and technology. Now plan sponsors are coming full circle, back to their original emphasis on investment management. They want the flexibility of choosing the best funds from outside managers within their bundled service programs. The new market emphasis is evidenced by the number of vendors now offering funds from outside managers in their bundled products," said Adele Heller, associate director at Rogers, Casey & Associates Inc., Darien, Conn.
"It's a more balanced approach now to DC plan management. Sponsors are concentrating as much attention on investment management as they are on the plan service side," said Ms. Heller.
The trend is apparent among the 36 investment managers who made the list of the top 50 vendors profiled in this issue.
More than half (23) of investment managers among the top 50 vendors have formal alliances with outside fund families, with smooth, automatic links between their record-keeping system and the outside manager. Most of the highest ranking managers in P&I's ranking by participant numbers offer funds from between two and 40 external fund families. The average number is about 10 alliance partners, with the most popular including A I M Management Group Inc.; Franklin Advisers Inc.; Scudder, Stevens & Clark; Warburg, Pincus Counsellors Inc.; and Neuberger & Berman. Even the chart topper, Fidelity, now has an agreement with nine outside fund families. Metropolitan Life Insurance Co.'s Defined Contribution Plan Group, Hartford, Conn., just added funds from eight outside fund families and from five operating subsidiaries.
"More and more vendors are under pressure to offer outside funds. Those that don't will be pressured into it," said Jeffrey S. Close, a consultant with Access Research Inc., Windsor, Conn.
A number of large defined contribution market players still don't have formal alliance agreements with outside managers, including T. Rowe Price, State Street Bank, Twentieth Century Investors, Kansas City. Mo., Principal Financial, Zurich Kemper Investments, Chicago, MFS, Boston, Janus Capital Corp., Denver, Putnam Investments and The Copeland Cos. Some of these companies allow a plan sponsor to include outside funds within a bundled program on a negotiated basis, but market consultants remain convinced the wave of the future is a multifund, bundled program, a one-stop-shop in the true sense of the word.
Technology issues are becoming a frequent differentiating factor for plan sponsors in vendor selection, noted Mr. Close. "Sponsors want to know that their vendor has cutting edge technology features, like Internet communications and account transaction capability, even if their plan will never use it. They're asking about technology in the RFP process and in face-to-face meetings and if a vendor doesn't have a good answer, it could be an excluder," Mr. Close said.
Most of the top vendors have extensive daily valuation capacity, systems consulting capability and sophisticated automated voice-response systems.
The hottest new twist is Internet communications abilities. Of the top 50 vendors, 28 have or plan in 1996 to give sponsors or participants access to variously detailed retirement plan information via the World Wide Web.
Private, secure networks are offered by 22 of the top rankers, either solo or in addition to Web connections. Most of those companies not offering online services now said they intend to do so in the future.