Market Insight from Fred Barstein

Fewer Choices in 401(k) Service Providers

As I prepared the 401(k) Service Provider List* for the October 2004 issue of Employee Benefit News (which, by the way, incorrectly listed “average plan size” as the “number of participants”), I was struck by how few full-service national 401(k) providers are left. Scouring through internal and industry lists, we could only find 81 providers that offer full service, either themselves, or through partners nationally (see list below). Meanwhile, there have been over 70 consolidation events since 2000 including exits, sales, partnering, outsourcing and mergers (see list below). Granted that many of these events were by the same companies, it was nevertheless a sobering exercise.

*The Service Provider List, which is brand new and available on our website, includes brief information about all providers such as Markets Served, Distribution Methods, Key Contacts, and Assets & Plans Under Management.

Depending on the size of the prospect, how you want to be compensated, and the type of investments offered, there will only be 10-15 viable providers. For very large or very small plans, or special needs plans, the choices are even more limited. Based on profitability data and pressure on fees, this number will shrink further. No question that provider consolidation was healthy, eliminating many that had untenable business models, extremely poor service, or took advantage of unknowing sponsors abetted by blind squirrel advisors, but perhaps we are starting to cut too close to the bone. And, according to industry pundits, there will be few if any new competitors.

The result of less competition is higher costs and less innovation. We have yet to see it happen, but it will happen if new competitors do not push the old guard. At an industry conference, I asked a panel of experts that included senior executives from ADP, Fascorp, Bisys and Hewitt what types of companies might enter the 401(k) market. The answers ranged from IBM or PeopleSoft to broker dealers that control distribution. Though no one believes that a new record keeping system with any scale will be built anytime soon, companies like Ameritrade, E*Trade and TD Waterhouse that have brand recognition and technology to market to retiring baby boomers and can make money managing $15,000 accounts, could become new competitors in the age of rollovers. Incumbents like Schwab and Fidelity might not be hurt but “no-brand” providers struggling to retain rollover assets will suffer. These new competitors will become even more viable when ETF’s become available in DC plans.

No doubt that we are in the midst of a buyer’s market but we may start moving towards a seller’s market soon unless the top tier providers, currently feasting on vulnerable competitors, start seeing new competition.

National 401(k) Service Providers
ABN AMRO Trust	Marshall & Ilsley Trust
ADP	MassMutual
AIM	Mellon HR
Alliance Benefit Group	Merrill Lynch
AllianceBernstein	Met Life
American Express	Metavante
American Funds	MFS Financial Services
Ameritas Life	Milliman USA
Amvescap	Morgan Stanley
AXA Equitable Life	Mutual of Omaha Companies
Bank of America	NatCity
BankOne	Nationwide
BB&T	Newport Group
Bisys Group	NYLife
Ceridian	Ohio National
Charles Schwab Corporate Services	OneAmerica (formerly AUL)
CitiStreet (Large Market)	Oppenheimer
CitiStreet (Small-MidMarket)	Paychex
Comerica Bank	Pentegra
CPI Qualified Plan Consultants	Plan Administrators Inc.
CUNA	PNC Advisors
DailyAccess.Com (DAC)	Principal
Diversified Investment Advisors	Prudential Life Insurance Co
ExpertPlan	Putnam (Mercer HR)
Federated Retirement Solutions	RSM McGladrey
Fidelity Advisors	Scudder
Fidelity Investments	Securian
Fidelity RIA Group	Standard Insurance Company
First Mercantile	SunTrust Bank
Franklin Tempelton	T Rowe Price
Goldk	The 401(k) Company
Great West	The Vanguard Group
Hartford	Transamerica
Hewitt Associates LLC	Travelers
ING	U.S. Bank
Invesmart	Unified Trust
J.P. Morgan	Union Bank of California
JW Seligman	Union Central
Lincoln Financial Group	Wachovia
Lord Abott	Wells Fargo
Manulife

401(k) SERVICE PROVIDER CONSOLIDATION
PROVIDER	ACTION	SUCCESSOR	DATE
Southtrust	Sold	Wachovia	Pending
Putnam	Carve out	Mercer HR	2004
American Express	Outsourced ($5-$50mm)	Great West	2004
BancOne	Sold	JP Morgan	2004
Bank of NY	Sold	Wachovia	2004
CNA Trust	Sold	Union Bank of California	2004
AG Edwards	Sold	CPI	2004
Harris Bank	Sold	Wells Fargo	2004
John Hancock	Sold	Manulife	2004
Strong	Sold	Wells Fargo	2004
Pioneer	Exited		2003
Safeco	Exited		2003
401k Company	Exiting small market		2003
GE	Outsourced	Bisys	2003
Delaware	Outsourced small plans	Bisys	2003
Putnam	Outsourced small plans	Expert Plan	2003
US Bank	Outsourced small plans	Bisys	2003
American Century	Sold	JP Morgan	2003
Cigna	Sold	Prudential	2003
Emjay/Wells Fargo	Sold	Great West	2003
Enterprise/MONY	Sold	AXA	2003
Federated Insurance	Sold	Great West	2003
Fleet	Sold	Bank of America	2003
mPower	Sold	Morningstar	2003
Northern Trust	Sold	Hewitt	2003
Pan American	Sold	Securian	2003
PFPC	Sold	Wachovia	2003
Scudder	Sold	ADP	2003
UMB	Sold Retirement Business	M&I	2003
American Skandia	Exited		2002
Emplanet	Exited		2002
Guardian	Exited		2002
Nippon Life	Exited		2002
State Street Research	Exited		2002
Trustar	Exited		2002
Persumma	Merged	MassMutual	2002
Bank of NY	Outsourced	PFPC	2002
CBIZ	Outsourced	Bisys	2002
Merchantile Bank	Outsourced	Bisys	2002
National City Bank	Outsourced	Hewitt	2002
SunTrust	Outsourced <$3mm	Nationwide	2002
Administrative Management Group	Sold	Lincoln Financial	2002
Key Bank	Sold	Principal	2002
Provident Mutual	Sold	Nationwide	2002
Fleet	Outsourced	INVESCO	2001
LaSalle Bank	Outsourced	Chicago Title & Trust	2001
Morgan Stanley	Outsourced	ADP/Fidelity	2001
PaineWebber	Outsourced	MFS	2001
Wachovia	Outsourced large plans	Invesco	2001
Allmerica	Sold	Securian	2001
Reliastar	Sold	Aetna	2001
Teamvest	Sold	Newport Group	2001
Unifi (PWC)	Sold	Mellon HR	2001
UPI	Sold	Bisys	2001
Wachovia	Sold	First Union	2001
MetLife	Sold large plans	Hewitt	2001
John Hancock	Sold Retirement Business	UPI	2001
Huntington Bank	Exited		2000
Prudential	Outsourced <$3mm	Bisys	2000
T Rowe Price	Outsourced small plans	Trustar	2000
Merrill Lynch	Sold <$3mm	Bisys	2000
Chase Manhattan Bank	Outsourced	Fidelity	1999
CitiBank (Copeland/Smith Barney)	Merged	CitiStreet	1999
MetLife	Merged	Gen Am & New England	2002
State Street	Merged	CitiStreet	1999
American Century	Outsourced/Exited Small Market	ADP	2000
Bank of America	Outsourced	ADP/Aegon	2000
Aetna	Sold	ING
Emjay	Sold	Wells Fargo
PFPC	Sold	PNC Bank
Transamerica	Sold	Aegon