FORT WORTH, Texas - American Airlines Inc. hired J.P. Morgan/ American Century as record keeper for its $3.8 billion 401(k) plan, marking the first time the venture has agreed to take on record keeping while indirectly managing only a small slice of plan assets.
It also is the first plan to move from Towers Perrin to J.P. Morgan/ American Century for defined contribution plan record keeping alone since Towers Perrin privately informed its clients that it was getting out of the defined contribution record-keeping business.
"We are in the process of phasing out our defined contribution business and we expect to complete the process by the end of this year," confirmed Stanley Davis, Towers Perrin spokesman. "We are taking existing clients and transitioning them" to J.P. Morgan/ American Century.
This is part of a little-heralded arrangement between J.P. Morgan/American Century Retirement Plan Services, Kansas City, Mo., and Towers Perrin, New York, in which J.P. Morgan/American Century agreed to provide defined contribution administration and investments, and Towers Perrin offers defined benefit administration and record keeping.
Fees will be paid from plan assets, with revenue-sharing agreements between the companies.
The American Airlines plan is the first new business won by the J.P. Morgan/American Century/ Towers Perrin alliance since it was formed in November.
Towers Perrin would not reveal the number of clients affected or the amount of assets in the plans being directed to J.P. Morgan and American Century.
Pensions & Investments data show Towers Perrin's record-keeping clients include Dallas-based 7-Eleven Inc.'s $859 million 401(k) and profit-sharing plan and the $832 million defined contribution plan of SPX Corp., Muskegon, Mich.
Little warning
Currently, J.P. Morgan's investment management group, J.P. Morgan Fleming Asset Management, New York, manages a $600 million long-duration bond fund and a currency overlay program for American's $5.6 billion defined benefit plan, said Nancy Eckl, vice president of trust investments. J.P. Morgan Fleming also is one of two managers running AMR Investment Services Inc.'s American AAdvantage Large-Cap Growth Fund, which is an investment option offered in the American Airlines 401(k) plan; the firm manages $15 million of the large-cap growth fund, Ms. Eckl said.
Meanwhile, airline officials said they got little warning of the change. "Towers Perrin said that by Dec. 1, 2002, they would no longer record keep defined contribution plans," said Linda Simmons, 401(k) specialist at American Airlines. "Conversion is a yearlong process and so we had to decide on a record keeper pretty quickly. We did not have a year to make the decision."
So, American Airlines skipped its usual search procedure and didn't issue a request for proposals. Instead, it conducted the search internally and asked for proposals from four providers: Hewitt Associates LLC, Lincolnshire, Ill.; CitiStreet LLC, Quincy, Mass.; Fidelity Investments, Boston; and J.P. Morgan/American Century.
"It was a real learning experience, seeing how different companies conduct their businesses differently. They were each good and each brought unique features to the table," Ms. Simmons said.
So far, American Airlines executives do not intend to change the plan's menu of 26 investment options, she said.
Also in J.P. Morgan/American Century's favor was that it had been the provider for three of TWA's defined contribution plans, which had $536 million in combined assets, Ms. Simmons noted. American Airlines announced acquisition of TWA in January 2001 and closed TWA's defined contribution plans as of January 2002, she said.
The 20,000 participants who were not eligible to retire had the option of rolling their assets into American Airlines' plan, Ms. Simmons added. About $210 million of the TWA assets moved into American's plans, Ms. Eckl said.
"We felt that with the alliance with Towers Perrin, the conversion would tend to flow easier," she noted. "We liked their approach to communication. And on our site visit to Kansas City, we felt their culture and personality fit with us."
Moreover, J.P. Morgan/American Century agreed to a short blackout period.
"American Century committed to a minimal blackout," she said The conversion to J.P. Morgan/ American Century is scheduled for the Thanksgiving holiday.
Client-focused
Jeff Garrity, chairman of J.P. Morgan/American Century Retirement Plan Services, said agreeing to practically a record-keeping-only deal was just part of its "client-focused" approach.
"At J.P. Morgan Chase/American Century, we have to make sure we have the array of capabilities," and that would include providing record-keeping services without managing assets, Mr. Garrity said. "American Airlines had a specific issue. They needed to have a new defined contribution administrator."
J.P. Morgan/American Century is not the only bundled provider that is agreeing to take on record-keeping-only business. As the defined contribution market has been growing at a much slower pace than had been anticipated, providers have had to change their service models.
"It goes beyond staying alive," said Joshua Dietch, consultant with Cerulli Associates Inc., Boston.
Providers are forming alliances for a variety of reasons, including adding distribution channels, combining core competencies and gaining scale in the marketplace, he explained. This is driving some competitors to take on business they might not have undertaken when the market was growing more rapidly.
Earlier this year, Mellon H.R. Solutions took on the record keeping for SBC Corp.'s $12.6 billion 401(k) plan. Mellon already was the record keeper for SBC's $13.7 billion defined benefit plan.
Like American Airlines, SBC Communications had been forced to find a new record keeper in a hurry when its former defined contribution plan record keeper, MetLife Inc., New York, exited the business.
However, some consultants say money management firms that take on record-keeping-only clients must be desperate, because they make their money by running money.
"I think you will see additional consolidation on the record-keeping side. They are seeing a reduction in asset-base revenue because of the reduction of asset-base fees," said Ann Mahrdt, director of Spectrem Group, a Chicago-based consultant.
So, money managers are now looking to record keeping as a source of revenue, Ms. Mahrdt said.
