Crain News Service
BOSTON -- Fidelity Investments is really thinking small. It has joined with First Union Corp. on a program aimed at making 401(k) plans available to businesses with less than $250,000 to invest.
Called Advisor Retirement Connection, the program targets businesses with 25 to 200 employees. First Union estimates more than 3.5 million businesses on the East Coast qualify.
Participants will be able to invest in First Union's Evergreen Funds or Fidelity Advisor Funds.
The agreement is the latest of Fidelity's efforts to penetrate the market for small 401(k) retirement plans. Traditionally, the mutual fund giant has focused on midsized to large companies, a market that has matured, leaving Fidelity with little choice but to head downstream.
"There's tremendous room for growth at the low end of the market," said Karina Istvan, a fund consultant at Cerulli Associates in Boston.
Jude Metcafe, a senior vice president of retirement services at Fidelity Investments Institutional Services, said the company is talking to several other big banks about jointly marketing 401(k) programs to small businesses.
"We're trying to leverage Fidelity's size and market share with the distribution of a big bank like First Union," he said.
At First Union, Martha Hayes, senior vice president and head of small business banking, said: "Our customers really want something like this. A lot of banks say they offer 401(k) products to small businesses, but they have minimum asset requirements of $500,000 or $750,000, which are beyond the reach of many."
Ms. Hayes said First Union, based in Charlotte, N.C., decided on Fidelity because it can produce individual statements for employees and provide them with 24-hour telephone service, quarterly statements and tax reporting assistance.
"We didn't feel we could keep up with the record keeping if we did it ourselves," she said.
Fidelity is the nation's biggest manager of 401(k) retirement funds, with $253.2 billion in such assets.
But managing the 401(k) programs of small businesses isn't easy, even for a Fidelity.
Attending to small plans can be costly, time consuming and far less profitable than overseeing big ones.
Putnam Investments, for example, quit handling records for companies with fewer than 100 employees two years ago. "We decided to concentrate in the area where we could offer the best service most efficiently," said Matt Keenan, a spokesman for the Boston-based group.
Fidelity also is taking a risk that the banks will take control of the retirement assets of small businesses once they grow to where it becomes cost effective.
"We can't stop people from making those kinds of decisions," said Fidelity's Mr. Metcafe. "But I would hope the plan sponsors would be happy enough that they won't want to switch."
