NEW YORK -- A new industry standard will make obsolete the mutual fund alliances that are now based primarily on technology.
The Defined Contribution Clearance & Settlement system of the National Securities Clearing Corp. allows money managers, record keepers and trustees to communicate easily with each other via computer through a central processing system. Previously, mutual fund alliances and quasibundled programs were dependent on the compatibility of the firms' systems.
Fifty mutual fund companies have begun using the new centralized system for 401(k) plan processing. They include: Fidelity Investments; American Funds; Putnam Investments; MFS Investment Management; Federated Investors; and Lord, Abbett & Co.
The change, transparent to 401(k) plan sponsors and participants, will result in faster, more efficient, more accurate and possibly cheaper record keeping and trade clearance.
The deciding factor won't be how good a fund company's computer systems are, but how good the performance is and whether the fund manager will pay the distributor enough to carry the funds and promote them.
The focus in the industry now will shift to distribution: who has the best sales force, the best wholesalers, the most efficient way to get funds to participants --and how much a fund manager is willing to pay for that distribution.
If a fund manager can find a partner offering a retirement plan product that will carry his funds and sell them aggressively, the mutual fund company can get out of the record-keeping business, forget about forging technology alliances and just manage money.
Observers predict before long, most mutual fund companies and many banks, insurers, trust companies, record keepers and institutional fund outsourcing companies will join.
The DCC&S system eliminates the need for the complicated and expensive technology bridges companies have built piecemeal so they could offer outside funds within their retirement plan programs.
The system will change the marketplace's dynamics, said consultant Peter Starr at Cerulli Associates Inc., Boston.
The DCC&S system "creates an industry standard for open architecture in which the critical factor becomes distribution and the currency is an economic one -- in the form of revenue sharing. If compatible technology is no longer the reason for an alliance between companies, then the distributor of a retirement plan program becomes very powerful. Without technological barriers, you'll see mutual fund companies jostling for position on a good distribution network and probably paying big to get on it," Mr. Starr said.
Mutual fund companies, consulting firms, insurance companies, perhaps some larger banks, broker/dealers and other financial services companies with deep distribution channels could offer every mutual fund participating in the DCC&S system in their defined contribution plan programs.
A new research report on the retirement plan industry by Cerulli Associates predicts DCC&S will level the playing field for small mutual fund families with very good investment performance, but that lack "the technological muscle to gain shelf space on (existing) 401(k) plan platforms.
"The assessment for inclusion in a program no longer will be based on whether an administrator has (or has the resources to develop) an electronic relationship with the fund. Instead, the determination will be based on the fund's participation in DCC&S and its performance, style, purity and suitability to the individual 401(k) plan," the report said.
Linda McWhorter, a Dallas-based consultant with The Spectrem Group, said the retirement plan industry's wholesale switch to daily plan valuation and daily transaction capabilities five or six years ago was the driver behind alliances in the first place.
"The technology requirements of daily valuation required that companies figure out some way to get an automated feed to the transfer agent. Mutual fund companies, banks and insurers had to either build it or go get it through an alliance with someone who did have it," Ms. McWhorter said.
"The NSCC's DCC&S system will make alliances somewhat passe. I can't predict that they will all go away . . . but the need for alliances is much reduced," she said.
Both Mr. Starr and Ms. Mc-Whorter agreed adoption of the DCC&S system will accelerate consolidation among defined contribution record keepers and administrators.
The NSCC's timing is "very good," Ms. McWhorter said. "Everyone is ready and pushing for an automated processing system" primarily because "when daily valuation swept through the retirement plan industry, it was the death knell for in-house record keeping for almost all investment managers.
"Only the very top retirement plan vendors can afford to keep pouring money in to maintain and upgrade their systems. Smaller companies -- mutual fund companies and midsized banks -- will definitely outsource record keeping."
All this activity will force the plan administration industry into even tighter consolidation because of the considerable systems expenditures required.