Look to Small Firms for Growth in Retirement Plan Market

Article excerpt

There has been substantial attention given to the opportunities in management and distribution of defined-contribution retirement vehicles, particularly 401(k) plans.

The movement from defined-benefit to defined-contribution programs is well established. So is the related shifting of costs and asset allocation responsibility from the employer/ plan sponsor to the employee/ participant.

Based on company-level data from firms such as Access Research, it is also becoming well recognized that much of the growth of 401(k) assets over the next decade will be from newly established plans of smaller companies with under 500 participants, rather than from larger companies.

Foothold in the Sector

In one sense. banks are strongly positioned in the small-plan segment. The clearest example is where a relationship already exists with the employer company through other commercial bank product lines. The loan officer filing a growth company's financing needs has an enviable inside track for steering that company's retirement assets toward the bank's 401(k) offering.

As a result, certain banks are emerging as formidable 401(k) providers in their local markets. This general premise of cross-selling retirement products through existing regional relationships has also helped certain banks fuel their growth of 401(k) assets from middle-market companies with as many as 5,000 participants. NationsBank and Comerica Bank are two such examples.

Much of the middle-market activity takes place outside the retail registered representative's domain, however. Banks seeking 401(k) assets from large or middle-market employers/sponsors are almost virtually using institutional field sales personnel to identify, prospect, and close deals with these firms.

In the small-plan market, where registered reps are most likely to have a role, there are several issues being faced by banks to providers or distributors of 401(k) products.

The first is product structure. There are two basic forms of small plan 401(k) product: a group variable annuity, or a mutual-fund-based offering.

The annuity is by definition a packaged retirement product, and contains most of the necessary internal record keeping. The addition of plan-level information to an annuity record-keeping system creates a viable 401(k) product.

Several insurance companies, such as Nationwide, Manulif, and Principal, provide an attractive range of separate account investment options in their 401(k) annuities.

The largest drawback to annuity-based 401(k) products is often their cost. Expenses for death benefits and annuitization risk are borne by all participants, regardless of their desire for such features. Total annual expenses can run nearly 3% of assets and are often difficult to explain to the individual or the sponsoring company.

Insurance Channel

Variable-annuity-based 401(k)s are being sold most successfully to the smallest of 401(k) plans, usually under 100 participants, particularly through reps of insurance companies.

Outside the insurance channel, mutual funds are the small-plan investment options of choice. It is significant to note that Principal, which has the largest number of small-plan variable-annuity clients, recently announced that it will be providing a mutual-fund-based product in early 1994.

Mutual fund companies that have broker-dealer distribution are more visible in the small-plan market than those that distribute directly. Initially, these load mutual fund families appeared most often in small 401(k) plans through collaboration between brokers and outside administrators.

Fund families commonly involved in these collaborative efforts included American Funds, Colonial, Fidelity's Advisor series of funds, Kemper, Massachusetts Financial Services, and Putnam. …