Academic journal article ABA Banking Journal

401k Plans: Know Your Customer

Academic journal article ABA Banking Journal

401k Plans: Know Your Customer

Article excerpt

Banks are having to reassess marketing strategies in order to hold their own against nonbank competitors

Mutual fund companies now pose the greatest competitive threat to bank providers of 401k plans, according to a national survey conducted by the Optima Group, a financial services consulting firm, in conjunction with Phoenix-Hecht/Gallup, a financial research division of PhoenixHecht. The survey polled two groups: 401k participants, and senior officers at trust departments and trust companies.

Among the bank trust department and trust company executives, almost four out cf five (77%) ranked mutual funds "very" or "extremely" competitive, far more than those citing insurance companies 48%), other banks (30%), or brokerage firms 18%). "Competition is heating up in the maturing 401k market, and mutual funds are now well positioned to steal share from banks," says Kenneth Hoffman, president of Phoenix-Hecht. "While banks rely on traditional relationships with corporate customers, mutual funds have become more aggressive marketers. They have also gained a technological edge in daily valuation and participant recordkeeping."

Yet that gap is narrowing. Survey results show that most banks are now full-service providers: 97% offer investment management, 93% have prototype 401k plans, 88% offer trust accounting, and 86% provide participant recordkeeping.

"In effect, we've got a level playing field now," Hoffman says. That means that marketing programs to attract 401k business will become more common and more sophisticated. To maintain market share, bank providers will have to implement focused and aggressive sales strategies."

Competition is most intense in the middle market-which the survey defines as plans with $1-$5 million in assets and between 101 and 250 participants.

Client demand for daily valuation is prompting banks to provide mutual funds as an investment option. At present, 85% of the respondents offer collective investment funds; slightly more than half offer mutual funds.

How to reach customers. Custom reporting is now a competitive necessity. More than two-thirds of the respondents report that the frequency of their reporting for clients is very" or "extremely" flexible; a majority are similarly flexible in formatting reports.

Fewer than 50% of the respondents use traditional marketing techniques such as direct mail, print advertising, or telemarketing to reach prospects.

"To achieve or maintain parity with mutual fund companies, the new environment suggests different approaches for banks of different sizes," Hoffman says. For the largest providers, state-of-the-art full-service functions are simply the price of entry. To compete effectively, they must find competitive advantages by creatively packaging their investment options. "

Banks with trust assets of $1 to $5 billion will have to leverage their existing relationships and focus on market niches. The survey found that only 5% of all respondents use industry-specific marketing strategies, and Hoffman feels that there is an untapped opportunity here. "By demonstrating familiarity with the needs of specific types of plan sponsors, banks can carve out a profitable niche in the lower end of the market," he says.

Who buys the plans. Larry Marks, president of the Gallup division of Phoenix-Hecht, pinpoints specific marketing strategies that banks can implement in the 401k arena based on the responses of 401k participants. "We discovered that 44% of the owners of 401k plans are between the ages of 35 and 44," says Marks. A further breakdown of demographics of 401k owners shows that 61% are women and 38% are men.

Regarding education levels, almost half of the plan owners are college graduates, says Marks. …

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