The majority of the defined contribution plan record-keeping business is concentrated among 10 firms, according to the 2000 Pensions & Investments Defined Contribution Service Providers survey.
The 10 largest firms run about 72% of the $2.4 trillion in assets under record keeping by the firms surveyed, the survey indicated. Those 10 - from the most to the least - are Fidelity, TIAA-CREF, CitiStreet, Hewitt, Merrill Lynch, Vanguard, MetLife Inc., Putnam, T. Rowe Price and Aetna, which recently sold its retirement business to ING
Overall, Fidelity Investments, Boston, is in the top slot this year, record keeping the most assets, $480 billion, and participants, 8.3 million. The Teachers Insurance and Annuity Association, New York, ranked second in assets, with $295 billion, and eighth in terms of number of participants, with 2.3 million. Newcomer CitiStreet, Boston, ranked third in terms of both assets, $200 billion, and number of participant accounts record kept, 4.5 million. Hewitt Associates LLC, the only record keeper in the top 10 without a line of proprietary funds, was fourth in assets record kept with $180 billion, and second in number of participants with 4.5 million.
Hewitt was one of only five record keepers surveyed that do not manage money. The other four are Alliance Benefit Group, First Mercantile, Milliman & Robertson Inc., Seattle, and PFPC, Los Angeles. All of them serve mainly corporate 401(k) plans. However, PFPC does have clients with 457 and 403(b) plans. In all, 75 service providers responded to this year's survey.
Equitable Life Assurance Society of the U.S., New York, with around 46,000 plan sponsors, topped the list of service providers ranked by number of sponsors for which they provide record keeping. Ranked second is Principal Financial with about 32,000 sponsors
This year's survey was greatly expanded to include questions directed at defined contribution record keepers and the types and size of plans they are record keeping. For the first time, the survey asked about a record keeper's experience in the newly emerging Taft-Hartley member-directed defined contribution plan market and asked providers to indicate what size plans they service. Pensions & Investments' staff was assisted in the revamping with the help of Ron Eisen, president of Investment Management Consultants Inc., Portland, Ore.
Taking a weighted average of assets record kept, excluding company stock and self-directed brokerage accounts, the disposition of assets varied between money invested in record keepers' proprietary investment options and outside vehicles. For example, the most popular proprietary mutual fund asset class was large-cap growth which garnered about 16% of the assets record kept, followed by large-cap blend with 13%, large-cap value with 9% and Standard & Poor's 500 index funds with 7% of the assets. As for proprietary separate accounts and commingled accounts, stable value was the most used, with 13% of the assets, followed by S&P 500, 7%; balanced, 3%; and large-cap blend, 2%.
Although the most popular mutual fund for assets in non-proprietary vehicles was large-cap growth, 18%, and the second was large-cap blend, 11%, the third and fourth outside mutual funds were very different-foreign stock, 9%, and balanced funds, 8%. Like proprietary vehicles, the most popular outside separate and commingled account asset class was stable value, followed by large-cap growth, 4%, and large-cap value, 1% and foreign stock, 1%. The fourth most popular outside separate and commingled account asset class was midcap growth.
Record keepers still depend on money management fees to subsidize the growing number of services the market is requiring them to provide in order to compete, Mr. Eisen said. So, often record keepers require plan sponsors to have a certain amount of assets in their proprietary funds before giving sponsors their best price on fees, he explained. Moreover, record keepers generally insist that the most widely used funds in a plan be the provider's proprietary funds and that sponsors use funds the record keeper/manager believe are their core funds, Mr. Eisen said.
The best record keepers can accurately size up a plan sponsor's corporate culture and bring the sponsor a defined contribution package that fits that culture, consultants said. Smaller service providers are staying alive in a tight market by finding niche markets or providing cutting-edge technology, they added.
"Plan sponsors want to do as much as they can online," said Roxanne Fleszar, principal and founder of Financial Resources Management Corp., Peabody, Mass. "They want to provide census data online, remit money via the Internet and post money quickly."
Basically, plan sponsors are looking to the Internet to help them unburden their own human resources staffs, said Ms. Fleszar, whose consulting firm caters to the midsized plan market.
Plan sponsors also look for consistencies with a record-keeping firm, she said.
"They would like to see a firm where they will be talking to the same people for the long term," she said.
Often when the person caring for the sponsor's account leaves the record-keeping firm, plan sponsors have to start all over introducing themselves and educating the new person about the firm's needs, she said.
"My clients really care about that" consistency, she said.
"I think the single biggest thing for companies looking for a service provider is a broader array of services than 401(k)," said Peter Smail, president of Fidelity Employer Services, Boston. "There has been accelerated demand for total benefits outsourcing in companies who are looking for more than a 401(k) provider. They are also looking to our health and welfare and payroll business."
In the past 12 months, RFPs of some 65% of plan sponsors with more than 10,000 employees asked for services beyond 401(k), double the number in the previous 12-month period, Mr. Smail said. Between 25% and 30% of midmarket plans with 1,000 to 10,0000 participants looked for services in addition to 401(k) services.
"We're seeing a new definition of what a 401(k) provider needs to be today," he said. "Sponsors are looking for outsourcing of all benefits in an single provider."
The bigger record-keeping companies will have an advantage in this new world, he said.
"I think certainly scale will be one of the critical factors for success," Mr. Smail said, pointing to several recent joint ventures created by money management firms in order to gain the scale needed to attack the defined contribution market. Among these are Citigroup and State Street, Howard Johnson and Merrill Lynch, J.P. Morgan and American Century, he said.
"I think scale is certainly one of the important things a company will have to have to be in the business long term," Mr. Smail said. "This is for the mere fact that it takes a significant amount of investment to provide these other services and integrate them for the plan sponsor and the end user - employees."
In the future, Fidelity will target its total benefit outsourcing capabilities to the medium market and, after that, the small market, Mr. Smail said. Moreover, he said, its new e-401(k) product, a totally online, flexible prototype 401(k) plan, will gain market share in the smallest plan market. Fidelity expects to have sold 750 plans this year, double the anticipated sales when it launched the plan in March, he said. Most of the plan sponsors using the service are tiny companies that could not afford to offer a 401(k) plan.
Service providers also are hunting in the wilds of unfamiliar market segments to keep or retain market share. Service providers that had restricted their business to corporate 401(k) plans now are offering services for the growing number of member-directed Taft-Hartley plans, and some mutual fund companies are challenging insurance companies, which in the past held most of the 457 and 403(b) plan business.
But still relatively few record keepers offer services to those markets. For example, only 19 companies that answered this survey question indicated they service Taft-Hartley plans. Banks and insurance companies still have most of that business. Record keepers with the largest number of Taft-Hartley plans are Wells Fargo, CIGNA Retirement, First Union National Bank and MassMutual Financial Group.
"Taft-Hartley has been a cool market," said Tom Johnson, senior vice president of MassMutual, Springfield, Mass. "We are not real flashy and it plays well for us. It's a cultural fit."
New York Life Benefit Services LLC, Parsippany, N.Y., is among those focusing on member-directed Taft-Hartley defined contribution plans.
"Taft-Hartley is an emerging trend and that will go for a period of time," said Tom Clough, president of New York Life Benefit Services.
Mr. Clough said the high level of service and the firm's technological capabilities distinguish the company from its competition.
"I believe our service is not only the highest quality but very comprehensive," he said, noting New York Life also has total benefits outsourcing capabilities in which it offers an array of services to the plan sponsor on a single website.
"Our background is as a consulting firm," Mr. Clough said, referring to ADQ Inc., which has been acquired by New York Life. "We have been able to pull the entire retirement program together and consult to make the best program."
Fidelity Investments has made some headway among the 26 record keepers who reported being in the 403(b) market, ranking second to Equitable Life for the most 403(b) sponsors record kept. Rounding out the top record keepers in the 403(b) arena are MetLife, Aetna Inc., SAFECO Life & Investments, TIAA-CREF, American United Life Insurance Co. and CitiStreet.
Aetna Financial and ICMA Retirement Corp., Washington, serve the most 457 plans of the 20 companies that reported record keeping for those plans. But Equitable Life, SAFECO and American United also rank highly among record who provide services for 457 plans.
Mr. Eisen agrees that competition in the non-corporate defined contribution markets is increasing. And one of the reasons record keepers are finding fertile fields is due in part, to a changing business model in those areas of the defined contribution/deferred compensation industry.
For example, 403(b) plans had been serviced by multiple record keepers, mainly insurance companies."It was unruly," Mr. Eisen said. "But it's being replaced with a system where there is one service provider. It's a specialty but it's growing like crazy."
What is attracting mutual fund companies and other traditional 401(k) providers is that participant balances are double the industry average. "It's a very good area and a lot of companies are trying to make it their turf," he said.
Although each market segment is unique, Fidelity has been successful in capturing about a 13% share of the 403(b) market, in part because of the consolidation of the health care industry, said Guy Patton, president of Fidelity's tax-exempt business. This has caused the health care industry - both for-profit and not-for-profit segments - to think, behave and act more like corporate America, Mr. Patton said. A single provider takes less time and effort than do multiple providers, he said.
"We've been moderately successful in the public sector, which historically has been dominated by the defined benefit plans, and really just now are coming to embrace defined contribution plans and they are in the early stages of that kind of shift," Mr. Patton said.
Banking on technology
Many service providers are banking on cutting edge technology to keep them viable in the defined contribution business, said Darlene DeRemer, managing director of e-business advisory services for NewRiver Investor Communications Inc., Andover, Mass. Many added features, like investment advice and self-directed brokerage accounts, are becoming commodities that service providers need to have to participate in the competition for new business, Ms. DeRemer said.
"But the reality is that between 10% and 15% of plan sponsors offer self-directed windows and participant usage is much lower," she said. Some of the problem is that participants get prices at the end of the day through their defined contribution plans whereas if they use their own brokers outside the defined contribution plans, they could get the prices the minute they place buy or sell orders, she explained.
"A lot of the existing legacy systems cannot accommodate it," Ms. DeRemer said.
Another trend is the evolution of the information portals for plan sponsors that put service providers and plan sponsors together, she said.
These sites are putting into the public domain a lot of information, like prices, that service providers would have preferred to have kept obscured, she said.
"It's a whole new ball game," Ms. DeRemer said. "Are the plan sponsors going to embrace using (portals)? Some will use them but the high-tech and high-touch will win the day."