ATLANTA - INVESCO Retirement Inc. wants to defy predictions and make it in a business others have given up on - the defined contribution record-keeping business.
Now that the business is profitable, INVESCO officials are taking on the record-keeping businesses of several banks and regional money managers, including some of their staffs, said Bob O'Connor, president and chief operating officer of INVESCO Retirement.
The latest in a string of deals is an alliance with Fleet Retirement Plan Services, Boston, in which Fleet will outsource its record-keeping business, and include INVESCO and AIM funds in its menu of investment options offered mainly to small and midsized plan sponsors, Mr. O'Connor said. INVESCO also will assume Fleet's record-keeping facility in Lincoln, R.I., retaining the record-keeping and support employees there, he added.
The Fleet deal, which transfers record keeping of $6 billion for 150,000 participants, brings INVESCO's total to $30 billion. It is INVESCO's fifth such deal in less than four years.
"Around here, we called it the tsunami," Mr. O'Connor said.
On May 1, the Fleet alliance was finalized, said Gary Anderson, managing director with Fleet Retirement Plan Services. "As you look at the market that is relatively mature at this point of time, the technology is changing so rapidly that the business requires scale and efficiency to compete," he said. "We wanted to enhance our products with someone who has made the technology investment and leveraging scale and INVESCO has met all the criteria. The marketplace is challenging and you can't always do it on your own."
Under the deals, INVESCO takes on defined contribution plan record-keeping and administration chores, saving banks the expense of keeping up with plan sponsors' desire for expensive Internet bells and whistles services such as real-time discussions between participants and service-provider representatives. In exchange, INVESCO gets the AIM and INVESCO funds run by its parent company, AMVESCAP PLC, Atlanta, included on the banks' menus of investments; access to the banks' lists of plan sponsor clients; and use of the banks' distribution networks.
According to recent studies by Cerulli Associates Inc., Boston, and Spectrem Group, Chicago, outflows from the defined contribution market, through employees changing jobs or retiring, are surpassing inflows from contributions and investment returns. Those conditions, combined with pressure on providers to cut fees, could make in-house record keeping a real money pit, some consultants said.
Nevertheless, INVESCO has taken on the record-keeping chores of five other service providers and might add more to the list by the end of the year.
Started with Aon
INVESCO's spree began 31/2 years ago when it shouldered the record-keeping and administration business of Aon Consulting, Chicago, which was unwilling to pay for the new technology needed to stay in the record-keeping business. INVESCO also took over Aon's Winston-Salem, N.C., office and hired 40 of its employees.
In December 1997, INVESCO took on parts of the record-keeping businesses of Banc One Corp. and First Chicago Corp., the same year the two banking giants merged. INVESCO performed record keeping for Chicago-based Banc One's small plans, defined as plans with $5 million to $20 million in assets, and First Chicago's larger plans, those with more than $20 million, Mr. O'Connor said.
Last year, INVESCO entered into an alliance with AmSouth Bancorp., Birmingham, Ala., because of AmSouth's well-developed distribution network in the Southeast
In March, INVESCO entered into an arrangement with Wachovia Corp., Winston-Salem, he said. Wachovia's defined contribution plan accounts should be converted to INVESCO's system in July, Mr. O'Connor said.
So why is INVESCO surfing into riptides?
"We're in one business. We're in the investment business, and services are tied to the defined contribution plan record keeping," Mr. O'Connor said. "We're not distracted by anything else. The key ingredient to making money is the investment product."
Five years ago, INVESCO made a heavy investment in technology, Mr. O'Connor explained. INVESCO partnered with SunGard Investment Management Systems, Fairfield, N.J., and perfected software that could do all defined contribution plan administration tasks, including record keeping, trading and voice response in a common system.
One thing INVESCO can do with the new system is create a data warehouse that allows a plan sponsor to create reports concerning its defined contribution plan without having to contact INVESCO.
Matter of scale
The decision by INVESCO executives to take on the record keeping of other service providers was purely a matter of economics.
"The more volume over fixed costs, the lower the unit costs," Mr. O'Connor said. "We chose banks because banks have investments that could complement AIM and INVESCO funds. They have great distribution and we have administration."
Banks also are rapidly losing market share, at least in the management of 401(k) assets, according to a recent Spectrem Group study for the National Defined Contribution Council. Mutual fund companies managed 49% of all 401(k) assets in 2000, up from 47% the year before. Meanwhile, banks lost market share, to 22% from 24%, the NDCC/Spectrem study revealed. Although in percentage terms the change was small, in dollar terms those two points translate into $34 billion of the $1.7 trillion 401(k) plan market. Banks also continue to lose ground in providing 401(k) record-keeping services, with 17% of market share in 2000, down from 18% in 1999. Some 36% of the 401(k) record keeping services in 2000 were provided by mutual fund companies, up from 33% the year before, the study indicated.
Fidelity Investments, Boston, adopted a strategy similar to INVESCO's this year, with deals to align with Banc One in April to assist 401(k) plans with between $1 million and $5 million in assets, and a similar deal with Harris Bank Corp., Chicago, a unit of Bank of Montreal in March, according to Jeff Cathie, a company spokesman.
"It's an example of what we will see more of in the future," said Lisa Baird, consultant at Cerulli Associates Inc., Boston. "Banks won't do the record keeping but will outsource with a company that could `private-label' it, so it won't be transparent at all."