VALLEY FORGE, Pa. - The Vanguard Group of Cos. Inc. won't accept any new bundled 401(k) plan business for the remainder of 1997.
Vanguard executives quietly declared the moratorium on new bundled business following an unusually heavy volume of 401(k) plans hiring the firm during the first half of the year.
Company officials say the firm has reached its capacity to convert bundled plans - those switching from other providers - by year-end.
"The business we have had during the first six months of the year would make people drool in a three-year period," a spokesman said.
Vanguard, however, still is accepting new investment-only business from 401(k) plans.
Other providers - including American Century, Merrill Lynch, State Street Global, Putnam and American Express - still are accepting new bundled clients for year-end conversions because they haven't reached their capacity limits yet.
William McNabb, senior vice president-institutional at Vanguard, wouldn't reveal the number of plans that hired Vanguard during the first six months or the number of participants in those plans.
Vanguard's institutional assets have grown to $118 billion as of June 30, from $98 billion as of Jan. 1, mostly from 401(k) plans. The figure includes market appreciation and additional money from existing clients.
He and other Vanguard officials said the capacity problem is due to the amount of time and labor needed to fully integrate a bundled client.
The problem is not with the computerized record-keeping systems, but rather with making the most effective use of qualified manpower.
"Year-end conversions take a lot of time and we manage our volume for year-end very carefully; we don't want to be overcommitted. If someone with no prior conversations with us came in now (seeking a year-end plan conversion) we would tell them to wait until later," Mr. McNabb said.
"We look at the resources we have available and the clients out there and try to manage it. We've gotten a lot of commitments early in the year for end-of-the-year conversions," he said.
Mr. McNabb said converting a bundled plan can take upward of six months "to do it right." And, he said, "the question is, 'Can you deliver quality client servicing?'"
Mr. McNabb said seeking increased volume "could cause a drop-off on the service side . . . It really comes down to how much business you can digest in a certain period without client service starting to suffer."
Other major mutual fund service acknowledge conversions entail substantial manpower and time and that it would be difficult to convert a large plan by the end of the year.
Even if a full-service provider has capacity, time constraints are expected to pose a problem later in the year. A company can convert only a finite number of companies between now and Dec. 31.
Yet, most say they still have capacity to convert plans with a year-end valuation and none say that new bundled plan conversions will have to wait.
Tom Kmak, senior vice president-retirement plan services at American Century Investments, Kansas City, Mo., said his company could accept new business as late as October and still deliver year-end valuation with "no problem."
A spokeswoman at Merrill Lynch Group Employee Services, Princeton, N.J., said: "We are not experiencing any capacity problems but if plans come in late in the year (for a year-end conversion) it becomes a time problem rather than a capacity problem," she said.
State Street Global Advisors, Putnam Investments and Fidelity Investments, all in Boston, and American Express Retirement Services, Minneapolis, could accept new bundled business until sometime in the fall for year-end conversion, officials there said.
"We have had no capacity issues in recent years nor do we expect any," a State Street spokeswoman said.
But Vicki Senger, manager-product development at American Express, said conversions shouldn't be rushed.
"It can be done in two months but the tradeoff would be that you would lose valuable time necessary to communicate and provide employee education about the new plan," she said.
Robert Richey, senior vice president-investments at American Express, said Vanguard's action "seems to me an indication of a lot of business and success at Vanguard."
"The pipeline fills up during the first six months and the fact that they recognize it and are allowing for their limitations and are trying to keep that from affecting existing relationships is probably a good thing," Mr. Richey said.
Commenting on Vanguard's situation, Mary Rudie Barneby, president of Delaware Investment & Retirement Services Inc., Philadelphia, said: "It's a good problem to have."
Ms. Barneby said a slowdown in new 401(k) conversions is a reasonable step. The concern, she said, is "about capacity and converting clients already in the hopper in an orderly fashion."
Mark Naber, managing director at the Optima Group, Fairfield, Conn., which provides strategic consulting to the financial services industry, said announcing such a slowdown is uncommon.
But Mr. Naber, said Vanguard probably made a wise business decision.
"I'd be surprised if any mutual fund company would jeopardize long-term profit potential by taking on more than they can handle," said Mr. Naber. "The best profit provider is retaining existing business .*.*. If you lose a 401(k) relationship within the first three years, you are likely to lose money on that entire piece of business. It is in their interest to retain existing business, which is highly profitable over time."
A spokesman at T. Rowe Price Inc., Baltimore, agreed a measured pace is best.
"You don't want to have to hire 20 people just to manage a conversion and then have them sitting around after the conversion is complete," he said.
The spokesman said conversions can be done in 90 days or less, but typically take six to seven months because plan sponsors and providers use the conversion process to redesign the plan, communicate to participants and expand investment options.
In addition, he said, there are many technical and administrative tasks involved in converting from one provider to another, including running a parallel accounting system for several weeks, transferring account balances and setting up new accounts, asset valuations and a blackout period for account transaction activities.
