Although the 401(k) market appears saturated and assets shrank in 2000, new legislation recently passed in Congress should bring in new assets, requiring fund companies to double their efforts at marketing to plan sponsors, according to analysts in the retirement industry.

Currently, the retirement market, especially the 401(k) market, is stagnant, according to Joseph Fein, a manager with human capital advisory services of Deloitte & Touche LLP of New York.

"The market is saturated," he said. "It's difficult to enter the market as a new plan provider."

In fact, 401(k) assets dropped $72 billion to $1.766 trillion in 2000, according to Cerulli Associates of Boston. It was the first year in which 401(k) assets dropped, Cerulli said.

But with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 late last month, assets flowing into 401(k) plans should increase dramatically, said David Wray, president of the Profit Sharing/401(k) Council of America of Chicago, Ill. The legislation, which goes into effect next year, will raise the limits for 401(k) plans from $10,000 to $15,000, he said. The limit on contributions to IRAs will rise to $3,000 next year and increase to $4,000 in 2008 and $5,000 in 2008, according to the Profit Sharing/401(k) Council.

Under the current limits, most plan providers cannot market to the small sponsor market because the cost of servicing those accounts is prohibitive, Wray said. Because the legislation will increase the contribution limits, sponsors that may have been too small to market to in the past will hold considerably more retirement assets, thereby making it possible to target those companies, Wray said.

Usually, smaller firms with less than 100 employees choose their plan providers by meeting with sales representatives and reviewing different plans rather than by going through a request for proposal process, he said. Generally, turnover in these plans is limited because personal relationships develop that tie the provider to the sponsor, he said.

Wray estimated that the current turnover rate of 401(k) plans is five percent.

The new legislation should expand the defined contribution system and increase contributions by as much as 50 percent, according to the Profit Sharing/401(k) Council of America. It will also make contributing to a company-sponsored plan a more attractive option to higher-paid employees who may have sought other investment vehicles due to the previous limitations, according to the council.

Currently, much of the new business that is being generated within the 401(k) market comes from small spin-offs of larger companies that need to set up a new retirement plan or firms that are dissatisfied with their existing plan provider and are interested in changing, said Fein of Deloitte & Touche.

While some plan sponsors are switching providers because of dissatisfaction with service or performance, many larger sponsors are changing their plans because they are interested in offering participants a greater variety of benefits like brokerage accounts, advice, lower fees, a greater variety of investment options and updated technology, Wray said.

Other important factors plan sponsors consider are the level of participant education and participant support, performance of the funds offered and the level of flexibility of the plan, according to Fein.

Whether the plan sponsor has 100 or 100,000 employees, fund companies need to market to plan sponsors effectively in order to succeed in the 401(k) market, according to Charles Chittenden, a principal and consulting actuary in the Arizona office of Buck Consultants of New York.

Marketing effectively means fund companies should establish what a plan sponsor's criteria are for its plan before responding to a request-for-proposal, he said.

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