Over the past six years, 50 investment management companies have opted out of providing 401(k) plans, and more will continue to consolidate or exit the business, according to New York Life Investment Management (NYLIM). Scale, money and resources to keep the business afloat are the key factors prompting providers to leave.

"The landscape of the business is forever changing, and the nature of keeping up with everything is costly," said Geoff Bobroff, president of Bobroff Consulting in East Greenwich, R.I. Unless a provider is able to sustain assets and grow the business, then it is hard and not worth the effort, he said.

The retirement business was booming from 2003 to 2005, and 2006 was expected to produce the same results, but the numbers came in low, experts stated. "Now CEOs are asking their retirement managers, Why are we in the business? Where are we going? Are we going to be a Fidelity or a major player in the business, and if so, prove to me how?'" commented Fred Barstein, president and CEO of 401kExchange of Greenacres, Fla.

This year alone, eight providers have exited the business. U.S. Bancorp's sale of its 401(k) retirement plan business to Great West Lifeco of Ontario, Canada, is one of the latest examples of retirement plan providers exiting the business. In October, Great West bought Metropolitan Life Insurance's 401(k) business. The U.S. Bancorp deal, which is expected to close this month, will have Great West acquiring 195,000 plan participants and more than $9 billion in retirement plan assets. U.S. Bancorp officials said the 401(k) business needs two to three million participants to support continued investments.

Among the larger deals this year was Ameriprise's sale of its business to Wachovia. The acquisition added Ameriprise's recordkeeping services at 225 retirement plans with nearly 700,000 participants with $28 billion in assets to Wachovia's business of two million participants with $100 billion in assets.

Other notable deals included Wells Fargo's acquisition of ABN AMRO's 350 employee benefit plans with $12.4 billion in assets.

As it's unlikely that newcomers will enter the 401(k) business, more companies will continue acquiring firms. Recently, for instance, Charles Schwab said it might use the proceeds from the sale of its U.S. Trust private-banking unit to Bank of America to make acquisitions that would expand its presence in the 401(k) retirement market. Some large companies that aren't in the business but might enter it through acquisitions include Bank of America and Washington Mutual.

To a certain degree, the success factor has to do with scale, experts say. "Companies need some type of scale and presence in the industry to compete, said Don Salama, senior managing director of retirement plan services at NYLIM of New York.

Providers are going to be either really big or really small; they can't be in the middle, Barstein said. Large companies offer many services and they focus on companies with a thousand or more employees, while boutiques offer specialized niche services.

Smaller boutiques are sometimes more efficient and less bureaucratic than large providers, Salama said. "Some providers who serve more than two million providers do not make as much money as a small boutique."

The business is competitive because fewer sponsors are changing recordkeepers as the quality of service continues to increase and investment platforms have become more open. There is 25% less turnover rate in sponsors changing recordkeepers then last year, Barstein noted. "Changing recordkeepers is similar to getting a root canal. You only get one because you have to, not because you want to," he said.

The industry has a turnover rate of 8% to 12% each year, Salama said. The number one reason a company will leave a provider is because of customer service, and the number one reason a company will buy into a new plan is a combination of value-added services, such as education, advice, tools and help from advisers, he said.

Providers need to distinguish themselves in the market, but most likely it will not be on variables of recordkeeping, technology and service, although all of the factors are important to the business, experts said.

If one provider has automatic enrollment, within six months they all offer the same thing, Barstein said. "Now there is less reason for sponsors to move, and it has caused a tremendous amount of consolidation," he commented.

Human touch from advisers and relationship managers is a way that firms can differentiate themselves, Barstein suggested. Additionally, providers that offer a successful income replacement and retirement plan for investors, and can prove it will work, will benefit, he added. No such plans are in place yet at any company, experts said.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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