The MassMutual Financial Group is the newest service provider to join other firms in an effort to increase their defined contribution business. In March, MassMutual announced the founding of Persumma Financial, a Lexington, Mass.-based subsidiary that will go after large defined contribution plan business, according to J. Spencer Williams, founder and chief executive officer of Persumma.
MassMutual's target is the midsized plan market. As of June 30, MassMutual had $21 billion under record keeping, up from $19 billion in 1999, according to Pensions & Investments 2000 Defined Contribution Service Provider Survey. The majority of the plans are corporate 401(k) plans.
The new entity is co-owned by MassMutual, Nextera Enterprises Inc. and Knowledge Universe, Mr. Williams said. The idea behind Persumma is to create a new model of service provider, explained Tom Johnson, senior vice president of MassMutual. Eventually, the defined contribution service providers are going to have to go retail, Mr. Johnson said.
"The consumer is going to realize they are driving the ship," Mr. Johnson said. "The trend is the consumer and understanding them on their terms and understanding the sponsor as a channel and attending the channel. The consumer is not being represented in the war, and they should be"
However, a service provider cannot operate a consumer business inside an institutional model, so Persumma was formed, Mr. Johnson said.
Although sponsors are still the buyers and still select the service providers, Mr. Williams says Persumma is consumer focused. Instead of asset-based fees, Persumma charges most of its fees per participant, for which it provides the universe of mutual funds and investment advice to assist participants in making fund choices, he explained. Plan sponsors pay fees attributable to plan activities such as form 5500 preparation. The benefit for plan sponsors is that corporate executives make fewer fiduciary decisions because they no longer are in the business of selecting a menu of investment options for their 401(k) plans. Currently, the investment advice is being provided by Morningstar's ClearFuture service, but this is not an exclusive arrangement, he said. Persumma will be considering additional advice providers next year, he added.
"Now service providers operate under a one-size-fits-all mentality," Mr. Williams said. "And plan sponsors are in a gatekeeper role, in which they have to get retirement benefits that fit a diverse population."
Plan sponsors are not expected to jump into the brave new world; Persumma is offering what executives call a "bridge strategy": Persumma provides model portfolios for which Morningstar selects the best three to five institutionally priced mutual funds in each asset category.
Unlike other service providers that offer investment advice, however, at Persumma the advice is not an optional element. Sponsors that choose Persumma's strategy of offering participants the world of fund choices receive investment advice along with it, he explained. Participants also get the opportunity to invest their 401(k) assets in securities through a "seamless brokerage," he added.
"Why don't we treat people like adults and give them choice and control within their 401(k)?" Mr. Williams asked.
And the entire service is offered online. Participants can ask questions, first online through web chat and then using an 800 number. They also receive an array of education materials from services including Dow Jones, Smart Money and Morningstar, he said.
"We're clearly driven on volume to be customer focused and not just plans and assets," Mr. Williams said. "The change could not be put in place a few years ago, but nobody anticipated that 401(k) balances would be many people's biggest retirement asset."
Persumma is expected to announce its first, non-beta testing plan sponsor before year-end, he said. That plan sponsor is offering Persumma's arrangement along side an existing 401(k) plan, Mr. Williams said.