QUINCY, Mass. - CitiStreet -the days-old joint venture of Citigroup Inc. and State Street Corp. - wants to be everything to everybody in the defined contribution plan market, but insiders are waiting to see if it really has the goods to take on competitors that already operate across the market spectrum.
Quincy-based CitiStreet will do everything for its clients except manage the money. Investment management will remain with the two parent firms, said Robert C. Dughi, president and member of the board of CitiStreet.
But officials at both companies say the venture will give them access to new markets. State Street executives expect Citigroup will ease their firm into the midsize and small plan market through its distribution channels, active investment options and enhanced services for smaller plans. Citigroup executives want to use the State Street brand name and indexed investment lineup to edge their firm into the large plan defined contribution market.
Both firms plan to make use of State Street's foray into total benefits outsourcing in the large plan market through its benefits administration subsidiary, Wellspring Resources. They expect to expand Wellspring's reach to midsize and small plans, and to have CitiStreet in place around the world as countries such as Japan pass defined contribution legislation.
Each parent company is contributing a subsidiary to the new venture. State Street is giving its retirement investment services business and Wellspring Resources, Jacksonville, Fla. Citigroup will add The Copeland Cos., East Brunswick, N.J., a retirement planning business now headed by Mr. Dughi.
"I think it's an interesting proposition. However, I'm not sure what's bringing up the pricing structure for passive investment management and how that is going to play in the brokerage-sold plan world," said Joshua Dietch, a consultant with Cerulli Associates Inc., Boston. "I'll be interested to see what the product looks like."
This is not the first time State Street has tried to break into the small plan market. A few years ago, it launched State Street Solutions, said James S. Phalen, executive vice president of State Street and head of its retirement investment services business and Wellspring Resources. He is also CitiStreet's chairman and chief executive officer.
State Street Solutions moved into servicing plans with between $25 million and $75 million in assets, and a year and a half ago State Street brought the administration in house, he said.
Competitors say CitiStreet might be a bit late in its move into the expected international defined contribution arena. Multinational companies are demanding a "single global provider" for all of their defined contribution plans, said Peter Smail, president of Fidelity Institutional Retirement Services Co.
"I think you (service providers) have to be there already, building systems and infrastructure," Mr. Smail said. "We're doing it today, taking the U.S. system and adapting it to the regulatory environments in the United Kingdom, Europe and Canada."
It is an advantage to "already be there," said Mr. Phalen.
But, he said, three critical elements are needed to successfully compete when the international markets open up: availability of the investments permitted by each country's regulations; distribution capabilities; and an array of services incorporated into bundled offerings. "I have not seen the defined contribution solutions of the future being rolled out yet," he added.
In any case, CitiStreet will not be ready to unveil its business models until it secures regulatory approvals, expected in the first half of 2000, Mr. Phalen said.
Another hurdle for CitiStreet, industry insiders say, is in total benefits outsourcing - in which a plan sponsor has one service provider handling all of its retirement, human resources and health and welfare plans. That area is expected to be the next frontier, but Wellspring Resources, while three years old, already has had a bumpy beginning, observers note.
Mr. Phalen said Wellspring now has a positive cash flow.
Consultants and third-party administrators welcome the attention to the small plan market. Consultants hope CitiStreet will bring a broader range of passive investment choices to the small plan market.
Few service providers offer index fund choices aside from Standard & Poor's 500 index funds, said Timothy Brown, principal of Retirement Plan Resources Co., Los Angeles.
"I think it's (the introduction of CitiStreet) important," Mr. Brown said. "But State Street is trying to compete with Fidelity at half the size."
The problem for CitiStreet is that index funds are attractive to plan sponsors because of their low cost. However, the small plan part of the market mainly is sold through brokers, who demand commissions for their services. Finder fees of around 25 basis points can obliterate the cost savings provided by an indexed strategy, Mr. Brown said.
Moreover, CitiStreet will have to persuade the brokers to give serious attention to defined contribution plan offerings, he said.
"Brokers do not stop selling one product and start selling something else tomorrow just because you want them to," he said.