The axiom that the big get bigger characterizes the top tier of defined contribution service pro-viders in the annual Pensions & Investments ranking.
Assets managed by the top 10 largest service providers of investments increased by 40% in 1997 to $791.3 billion, up from $564.6 billion in 1996.
The list of the top service providers remained largely the same in 1997 with a few shifts in position either up or down.
Fidelity Investments, Boston, remains the single largest defined service provider in most categories, as it has been for the past few years. Fidelity tops the list of providers for the number of plan participants covered by bundled services, and internally managed defined contribution assets.
The top five bundled providers, including in-house investment management, are the same as in 1996. Fidelity reported a total of 5.4 million participants covered by its bundled service program, more than double the 2.5 million participants reported by Merrill Lynch Group Employee Services, Princeton, N.J., which was second among the top five bundled providers.
Rounding out the list of the top five bundled service providers are Principal Mutual Life Insurance Co., Des Moines, Iowa, which reported nearly 1.7 million participants; Vanguard Group, Valley Forge, Pa., with 1.5 million participants; and Aetna Retirement Services, Hartford, Conn., which listed nearly 1.2 million participants.
Vanguard remains the top provider of defined contribution investment management-only services for the second year, largely due to the popularity of its successful S&P 500 stock index fund and low-cost mutual funds. Vanguard is followed by J.P. Morgan Investment Management Co., which jumped into second position in the investment-only category from seventh in 1996.
J.P. Morgan completed its minority purchase of American Century Investments, Kansas City, in 1997. Together, the two are focusing on expanding both bundled and investment-only business which now includes J.P. Morgan's investment management capabilities and mutual funds.
Morgan Stanley Asset Management Inc., New York; Janus Capital Corp., Denver, Colo.; and Certus Asset Advisors, a San Francisco-based stable value management firm, complete the top five providers of investment management-only services.
Hewitt Associates LLC, Lincolnshire, Ill., sits comfortably atop the list of bundled service providers, excluding in-house investment management, with a total of 4.5 million participants and 104 plan sponsors. Hewitt is followed by Buck Consultants Inc., New York, with 654 million participants and Wachovia Corp., with 307,000.
The top providers of record-keeping services are MetLife Defined Contribution Group, New York; Kwasha Lipton Group of Coopers & Lybrand, Fort Lee, N.J.; and Towers Perrin, New York, N.Y.
Market keeps growing
Based on the information garnered from the P&I survey of defined contribution service providers and other industry research, the market growth shows few signs of abating. The demand remains strong for bundled services, according to industry sources. But, they say, bundled no longer means that plans utilize a single fund family's group of mutual funds. Most bundled providers now allow a wide selection of non-proprietary investment options in their bundled packages.
But, except for the very largest defined contribution plans, the bundled approach appears to dominate the market and is propelling the growth among defined contribution service providers.
"Without a doubt, cost is the overriding issue," said Bo Abesamis, senior defined contribution specialist at Callan Associates, San Francisco. "It is going to be more difficult for TPAs (third-party administrators) to compete with bundled providers in the midmarket of $10 million to $100 million."
New battleground
"The major competition is taking place in the middle market," he said. "And for TPAs and alliances, it's a hard sell. There seems to be an advertising juggernaut of middle market funds and at the end of the day they can say that, 'We know that business.' Midmarket mutual funds, insurance companies and banks have penetrated that market deeper and for TPAs the track record is just not there," said Mr. Abesamis.
Joel Disend, president and chief executive officer of New York Life Benefit Services Inc., Norwood, Mass., said NYL's defined contribution business grew by 60% in 1997, and growth through the first quarter of 1998 has already exceeded that of the entire year in 1997, all of it bundled.
"Most plan sponsors have moved beyond the 'cheap and daily' environment of a few years ago and are looking more toward outsourcing, including human resources and benefits functions and offering more choices in their plans. We do all of that and better than most," said Mr. Disend.
He agreed the major growth is in the middle market since the large-plan market "has solidified," and "no one can figure out how to make any money in the small plan market."
"Bundling gets more and more powerful in a daily valuation environment .*.*. It's difficult to run a daily environment in an unbundled plan. Technology argues against unbundling," he said.
Tom Kmak, who recently assumed sole management responsibility for J.P. Morgan/American Century Retirement Plan Services, Kansas City, said the firm's business expansion has come in both bundled and unbundled assignments. J.P. Morgan completed its purchase of 45% of American Century in January.
He said the combined J.P. Morgan and American Century efforts in the future will be to add 50-70 "quality" bundled clients each year.
"Plans are not usually looking for unbundled services," said Mr. Kmak,
"We see the larger unbundled providers retaining their business, but there are not a lot of plans moving from bundled to unbundled. Usually those (unbundled) plans are adding or replacing investment options."
He said the combined J.P. Morgan/American Century focus in coming months will be to capture bundled business from some of J.P. Morgan's existing investment banking and defined benefit clients. In addition, he said, J.P. Morgan/American Century will focus on capturing bundled plans from "those firms which have been unable to demonstrate a real clear capability to be on the leading edge of technology and client service capabilities."
Merrill Lynch Group Employee Services solidified its position behind Fidelity as a bundled service provider in 1997 after moving into the top five bundled providers in 1996.
Ken Williams, vice president and director of employee benefit services at Merrill, said its total defined contribution business increased by 40% in 1997. Merrill's 1997 gains were aided partially by the acquisition of the MasterWorks division of Barclays Global Investors, San Francisco.
Mr. Williams, too, said most of the defined contribution service business at Merrill is in the bundled small- to midsized plan market. He said Merrill is one of the more "flexible" large providers in offering its bundled package which now includes offerings from 35 non-Merrill outside mutual funds.
William McNabb, senior vice president-institutional at Vanguard, echoed most large providers in calling 1997 a very successful year.
"That is a reflection of our value perception which has taken hold in the industry . . . Word of mouth is very powerful in the marketplace.," said Mr. McNabb.
He said the strong demand for Vanguard's low-cost services could lead to the same capacity issues it faced at the end of 1997 when it declined to accept new bundled plan conversions late in the year. (Pensions & Investments, Aug. 4, 1997)
He said Vanguard's capacity will be higher this year but "demand has been terrific" but that Vanguard "will be very disciplined about growth since growth is not an objective but a reward for doing things right. We will only deal with the growth we can handle in a high class level."
Vanguard's leading position among defined contribution services providers in the investment-only business is indicative of the strong demand for its equity index funds. But, said Mr. McNabb, there also is a growing acceptance among plan sponsors for its other funds. He said the demand for its actively managed funds is growing despite Vanguard's choice of not participating in any investment alliances with other funds or TPAs.
