BOSTON - Fidelity Investments is about to celebrate a record-breaking year for new 401(k) plan business, adding about $14 billion in new assets.
Those gains come despite a string of departures of big-name portfolio managers and operation staffers, net sales declines on the retail side and some fund underperformance.
And for now at least, Fidelity's defined contribution clients seem content to stay put.
Independent statistics confirm Fidelity's success. Through Oct. 31, net new institutional sales of Fidelity's long-term mutual funds through direct marketing and wholesale distribution grew 10.3%, according to data calculated by Financial Research Corp., Chicago.
But net retail sales of the same funds declined 29.7%, the data showed.
Fidelity saw even stronger institutional net sales growth of 28.2% through its broker/dealer division, Fidelity Advisors. On the retail side, however, net sales declined 41.5% through Fidelity Advisors, according to Financial Research numbers.
1996 has been Fidelity's most successful year ever for new 401(k) plan business, said Peter J. Smail, president of Fidelity Institutional Retirement Services Co.
Year-end sales probably will top $14 billion in assets Fidelity will manage in-house for more than 1,000 new 401(k) plans. Fidelity wouldn't say how much it gained last year, only that 900 401(k) plans became new clients of the firm in 1995.
Overall, Fidelity Investments' institutional business grew to $195.5 billion by Nov. 30, a more than 30% net growth in sales and market returns from the $149.2 billion it managed for institutions at the same time last year.
"We've gained a very long list of new clients, which includes some very well-known names. And some of our existing clients are adding to the list of Fidelity investment management options they already offer, which we think is a pretty powerful sign that institutional clients are satisfied with the service we are providing," said Mr. Smail.
Among them is General Motors Corp., Detroit, which just added 15 new Fidelity funds.
New clients include United Technologies Corp., Intel Corp., FMC Corp., Rubbermaid Inc., Northeast Utilities Service Co. Ryder System Inc., Kaiser Permanente, Seattle Deferred Compensation, Times Mirror Co., Shell Oil Co. and TJ International Inc.
Of the 1,000 new defined contribution plan clients, about 100 are large or midsized; the remainder are small plans with less than $15 million, Mr. Smail said.
Few institutional clients have terminated Fidelity for bundled defined contribution plan service or large investment management accounts, said Fidelity officials. Most terminations have resulted from mergers or acquisitions, where multiple defined contribution plans are being combined.
Market observers said they haven't heard of any significant institutional client losses this year, adding that Fidelity's strong position in the institutional area probably is not in any real danger.
"Typically, plan sponsors won't replace a fund unless its performance is absolutely terrible . . . especially a flagship fund like Magellan," said Darlene DeRemer, principal at DeRemer Associates, a market strategy consultant, Wrentham, Mass.
"One important area where Fidelity is very strong is record keeping, which is so difficult to do well. . . . (Plan sponsors) will be loath to end a relationship where the service is good. But they will add more fund options to compensate if the bundled provider's funds are poor performers."
Some observers attributed Fidelity's institutional client retention to a successful marketing effort following the highly publicized departure of Jeffrey Vinik, who managed the Magellan fund.
But institutional market watchers share a sense, mainly gained through anecdotal evidence, that Fidelity should be winning more new business than it is.
"Fidelity is not winning as much business as it used to, mostly because competitors have been successful in their attacks on Fidelity's funds from the 'what-you-see-is-what-you-get' standpoint," said Robert J. Powell, editor-in-chief of DALBAR Inc., Boston.
Added Jeffrey Close, a spokesman for Access Research Inc., Windsor, Conn.: "The other guys are competing better than they have in the past in bundled record-keeping situations and for investment management-only business, where the emphasis is on great performance of individual funds."
Like most bundled providers, consultants say Fidelity has had to conform to the latest demand from defined contribution plans for access to externally managed mutual funds.
Most observers are curious how much institutional money will flow through Fidelity's hands into the funds of alliance partners.
"Like any big provider, Fidelity will do anything to keep large clients, including adding access to outside funds. My guess is that Fidelity will begin to watch its market share decrease somewhat as assets are moved into the funds of other managers," said Mr. Powell.
Fidelity's new FundsNet mutual fund alliance, which offers institutional investors access to 55 mutual funds from 12 fund families, has passed on about $500 million to outside managers since its May introduction.
By comparison, Charles Schwab & Co., San Francisco, gained $558 million in the first six months it operated a competing program.