The main players in the dance of the top defined contribution service providers remained the same in 1998, they just changed places in Pensions & Investments' annual ranking.
Once again, Fidelity Investments, Boston, is the largest defined service provider ranked by total participants and of bundled services including in-house investment management. Fidelity reported a total of 6.2 million participants.
Hewitt Associates LLC, Lincolnshire, Ill., with 4.3 million total participants, remained in second place, while MetLife Defined Contribution Group, New York, which reported 2.7 million participants, dropped to fifth from third.
Merrill Lynch & Co., Princeton, N.J., with 3.5 million total plan participants moved up one notch into third place, and State Street Global Advisors, Boston, was fourth, with 2.8 million total participants.
Fidelity also topped the list of bundled service providers, including investment management, reporting a total of 6.2 million participants, far ahead of the second-place bundled provider, Merrill Lynch Group Employee Services, which reported 3.5 million participants.
Merrill Lynch completed its purchase of Howard Johnson & Co., New York, last September, which added to Merrill's consulting capabilities but did not significantly increase the number of participants, said Patrick Walsh, senior vice president of group employee services.
State Street Global Advisors, Boston, placed third in that category, with 2.8 million participants, and a newcomer to the rankings, Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, placed fourth with 2.1 million plan participants.
Reaching new employees
Recently, TIAA-CREF has been advertising on radio to reach its specialized participant class, said David Shunk, executive vice president of retirement services.
While most people already working in the education community are well aware of TIAA-CREF, those who are newly employed are not, he said. So, TIAA-CREF has begun to advertise so new employees are aware of the organization when it is time to choose a retirement program, Mr. Shunk said.
Rounding out the top five was Vanguard Group, Malvern, Pa., with 1.9 million participants.
For the second year in a row, Hewitt Associates topped the list of bundled service providers, excluding in-house investment management, with a total of 4.3 million participants and 160 plan sponsors. Hewitt is followed by PricewaterhouseCoopers Global HR Solutions, Fort Lee, N.J., with 1.4 million participants, and Dreyfus Retirement Services/Buck Consultants, Uniondale, N.Y., with 757,599.
The top providers of record-keeping services and administration services are MetLife; Towers Perrin, New York; and BISYS Plan Services LP, Ambler, Pa.
Based on the information from the P&I survey of defined contribution service providers and other industry research, the market growth remains strong, according to industry sources. Larger plans are finding they have sufficient assets in their plans to move from mutual funds into other types of investment options like separate accounts which give plan sponsors more control over investments and lower costs, they said.
Still, with the exception of the very largest plans, the bundled approach continues to rule the marketplace and is driving the growth among defined contribution plan providers.
"It's unusual to see a request for record keeper only," said Mr. Walsh.
And the service providers that are willing to provide services from soup to nuts are the ones that are succeeding, said Gary Blank, principal with William M. Mercer Inc., New York.
Part of the attraction is lower fees.
More plan sponsors are trying to downsize their fees, he said. In a current search involving a plan with about $80 million in assets and 750 participants, all but one of the responses to the request for proposals have included no fees for record keeping, Mr. Blank said.
"In proposal after proposal, there is no fee for record keeping or communication. They are only collecting investment management fees on mutual funds," he said.
This has caused service providers like Mercer, AON and Watson Wyatt Worldwide & Co., to "give up" on the record keeping business, Mr. Blank said.
Unraveling bundles
This push for lower fees actually has caused some of the largest defined contribution plans to start unraveling their bundled programs.
"The large plan marketplace is changing the fund structure," said Scott Peterson, practice leader, defined contribution services for Hewitt.
About 5% to 10% of the market in the last year moved away from mutual funds and toward separate accounts, he said.
Now that their plans are big enough, some of the very largest plan sponsors are choosing separately managed accounts in order to have more say in the funds' investments and to get lower fees, Mr. Peterson said.
"We expect to see more of it and it's a direction we like to see coming," he said.
At least one service provider is banking that the trend toward bundling will start to splinter.
"We've decided not to be fully bundled," said William D. Cvengros, chief executive officer of PIMCO Advisors LP, Newport Beach, Calif. "It's a question of profitability."
More than $13 billion of the company's $245 billion in assets under management are in the defined contribution area, Mr. Cvengros said.
Instead of incurring the heavy administration costs that come with offering fully bundled services, PIMCO has opted to plug into all of the major alliances, Mr. Cvengros said.
There probably will be a point where the trend to fully bundled turns and plans will go unbundled to achieve economies of scale, he said. At that point, PIMCO will be there with separate accounts or mutual funds with institutional share classes, Mr. Cvengros said.
Service providers also are becoming more flexible. Many are more willing to talk about special interests such as blending a GIC option into a stable value mutual fund, Mr. Blank said.
"At the same time, plan sponsors are looking for wider investment choices," Mr. Blank said.
This search for more investment choices to offer plan participants is attracting a growing number of plan sponsors to such options as self-directed brokerage accounts, said Sandra McCarthy, SSgA principal.
"There are a number of plan sponsors looking at adding it but the percentage of assets is still low," Ms. McCarthy said. "About 4% of plan assets on average are in these options but in professional organizations like doctors and lawyers, it is more like 30%."
Still, the market growth is moving farther downstream. Most of the growth in the defined contribution plan market will be among smaller and smaller plans, Mr. Blank predicted.
"Midlevel and larger markets have already changed to daily valuation and the majority to bundled providers," he said. "The market that is underserved for cost reasons is the one with plans with 200 participants and down and $10 million and down."
Some providers, like Fidelity, are starting to compete in that market, which in the past had been shunned because it was too costly, he said.
"There's not much face-to-face interaction but plan sponsors are getting voice response, customer service and quarterly monitoring," Mr. Blank said. The smaller plan sponsor also is getting a more limited array of funds without front-end loads.
While Fidelity has been "fortunate to be able to compete in all different market segments," Bob Reynolds, Fidelity president, acknowledged the growth area for new plans is in the small end of the market.
"The large end continues to be an opportunity but it is no secret that it is primarily a takeaway business. That is, you take business away from someone else."
Fidelity has a different strategy for the smaller end of the defined contribution market, Mr. Reynolds said.
"The real key is distribution," he said. Not only does Fidelity have a larger sales force throughout the country, but it also has employed prototype plans to create a wider distribution for its defined contribution programs, Mr. Reynolds explained.
For example, Fidelity has a project with the U.S. Chamber of Commerce in which anyone with a membership can participate in the defined contribution program, Mr. Reynolds said.
"Whenever you have an opportunity to create a private-label type product, it allows different avenues for distribution," he said.
Mr. Walsh of Merrill Lynch agreed the largest growth in 1998 and so far this year has been in the middle market. Merrill Lynch defines middle market as plans with between $1 million and $40 million in assets.
"It is well documented that the Fortune 500 companies, of which we have 25%, have plans and are with service providers," Mr. Walsh said. "The only opportunity for new business is to take it away from somebody else."
Merrill Lynch has geared its services to the high end of the middle market, he said.
"We see the midmarket as an extension of the large market more than an extension of the small market," Mr. Walsh said.
With Merrill Lynch's acquisition of Howard Johnson & Co., Mr. Walsh said his firm is poised to take advantage of all of the mergers and acquisitions activity.
Behind every merger there are two plans, and executives wondering where the plans are going, he said.
"The issue is when you're combining two cultures to make sure that the company does not have a takeaway regarding the benefits," Mr. Walsh said.
There is also a great deal of interest in providing participants with an independent investment advice option and personal financial planning, Mr. Blank said.
"Plan sponsors are trying to educate people how to manage their personal finance so they can get into their 401(k) plan," he explained.
Mr. Peterson concurred: "We see a great deal of interest in advice and continued interest and we think plan sponsors will move in that direction."
In part this comes from the push by plan sponsors to offer more investment alternatives, he explained. But participants want some guidance on how to invest with such a wide variety of choices, he added.
"But it's a marketplace that is still getting off the ground," he acknowledged. "We're continuing to evaluate the (advice) market."
