As fund executives evaluate their defined contribution (DC) administration and recordkeeping profit margins, many are deciding to abandon the business. In fact, the DC administration business, which serves more than 66 million participants in 476,000 plans with a total of $2.15 trillion of assets, has been in a state of continuing contraction.

Over the past several years, as corporate America has been pushing individuals to save in employer-sponsored retirement plans, assets in DC plans have grown tremendously - but many of these accounts are very small, noted Troy Shaver, vice chairman of GoldK, a retirement plan service provider based in Waltham, Mass.

"Mutual funds are gathering the bulk of the assets but are finding that servicing costs, [particularly for small plans], are high," Shaver said. So funds are asking themselves, should they stay or should they go?

In mid-June, Victory Capital Management of Cleveland, the asset management and mutual fund unit of KeyBank, announced that it would leave the defined contribution business, through which it has administered and made its mutual funds available to 1,400 plans with 373,000 total participants and $8 billion in assets.

Victory signed an agreement for an undisclosed sum with The Principal Financial Group of Des Moines, Iowa, to gradually take over the administration of its plans. One of the largest administrators in the nation, The Principal service DC plans with more than $41 billion in assets.

"The recordkeeping business is a very capital-intensive business primarily because of the computer technology that is required," said Ron Petrie, a Victory spokesman. For two years, Victory executives had been evaluating whether or not to remain in the business, a business in which Victory was just breaking even, he said. Executives recognized that they needed to upgrade their technology to remain competitive, but knew that if they made the necessary investment, that business would be running in the red for years to come. "We decided to put more resources into distribution of our funds instead," Petrie said.

As a tradeoff for Victory relinquishing administrative control to The Principal, many of Victory's 27 mutual funds will continue to be offered within these plans, Petrie said. Additionally, the two firms have agreed to offer additional funds that Victory sub-advises to other DC plans that Principal services, thereby accomplishing Victory's goal for broader fund distribution. "Many other funds see [the defined contribution] area as a way to sell mutual funds. But we don't need to control the platform to sell our mutual funds," Petrie said.

Likewise, early last year, U.S. Global Investors of San Antonio, Texas, advisor to the U.S. Global Investors Funds and the U.S. Global Accolade Funds, closed its 401(k) plan administration business in an effort to cut costs.

But it isn't just small players bailing out of the DC administration business. About 18 months ago, John Hancock Funds of Boston, also decided the party was over. The company sold its recordkeeping business to Universal Pensions, which was subsequently purchased by BISYS of New York. "It was a money-losing business for us," said spokeswoman Liz Kennedy. "We never had the economies of scale that you need to have in that business."

Hancock remains in the 401(k) business, but only through outsourcing, Kennedy said. Last year, Hancock allied with ExpertPlan of Cranbury, N.J., an online retirement plan administration company, to offer 32 Hancock mutual funds in plans that ExpertPlan administers. Hancock also offers back-office functions outsourced through BISYS.

Opportunists Looking for Assets

While many fund companies are exiting the 401(k) administrative business, there are a handful of eager, mid-size companies more than happy to grab up the business in an effort to grow their assets and achieve better economies of scale.

Last year, INVESCO Retirement of Atlanta snared the DC administration business of four banks that had chosen to exit, including Wachovia Bank of Winston-Salem, N.C., and FleetBank of Boston, said Hubert Harris, chairman and CEO of INVESCO Retirement. FleetBank alone brought INVESCO $5 billion in new assets and 100,000 participants. At the end of last year, INVESCO Retirement was servicing 1,541 DC plans with a collective $20 billion in assets. By comparison, INVESCO administered only $3 billion in assets at the end of 1996.

One of the ways INVESCO has been able to turn a profit in this business is through a new technology platform it installed in 1996. As well, INVESCO recently debuted a new electronic, Internet-based recordkeeping platform called the 401(k) STAR, designed for smaller plans with fewer than 500 participants.

Likewise, Franklin Templeton of San Mateo, Calif., has remained firmly committed to the 401(k) administration business, said Murray Cleaner, national sales manager of business retirement sales for the company. Franklin Templeton provides recordkeeping for $1.4 billion in DC plan assets.

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