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In retirement business, big players like Vanguard think small
May 8, 2014 / 7:05 PM / 3 years ago

In retirement business, big players like Vanguard think small

MALVERN, Pennsylvania, May 8 (Reuters) - Vanguard, the biggest U.S. mutual fund company, is going after small fish it once passed up.

Since 2012, the Malvern, Pennsylvania-based fund firm has quadrupled to roughly $4 billion the assets it administers in retirement plans holding less than $20 million in employee savings -- a market it once dismissed as a backwater.

Vanguard joins rivals like T. Rowe Price Group Inc in putting a new emphasis on the micro-plans. Both trail Fidelity Investments, the sector’s bigfoot with $94 billion in assets from smaller companies.

The newfound interest reflects how the largest corporate retirement plans are either locked up or bargaining hard on fees, while many smaller companies have room to cut their costs and are under pressure to do so.

Among 20,000 plans with less than $20 million in assets tracked by BrightScope Inc, total costs averaged 1.18 percent in 2012 -- more than three times the total average costs of 0.33 percent for top corporate plans with more than $1 billion in assets.

Small companies are “where the worst plans are today,” said Mike Alfred, BrightScope’s chief executive. Since 2012, 401(k) plans have been required by the U.S. Department of Labor to clearly disclose fees to employees.

Company 401(k) plans, combined, held $3.7 trillion at the end of 2013, according to research firm Spectrem Group, up from $1.9 trillion in 2008. Of that, about $700 billion was in plans with fewer than 100 participants.

The money is widely scattered and just finding it takes work. In Lewisburg, Pennsylvania, Annette Camuso-Sarsfield, human resources director for Playworld Systems Inc, a recreational equipment maker, said she gets a call a month from financial representatives looking to run her $18 million plan, twice the rate of a few years ago. She hasn’t changed plan administrators in recent years, but does review plan mutual funds and fees in order to remain competitive.

Vanguard began its small-business outreach in 2011, aiming to run the 401(k)s with the help of closely held Ascensus Inc, which runs websites and administrative services for the retirement vehicles.

Vanguard Managing Director Chris McIsaac said the effort reflects how low-fee Vanguard can underprice competitors -- and how it is harder to win new business from the largest corporations.

“It’s a mature marketplace,” he said. Signing up a big client “basically means you have to pry that relationship away from an incumbent manager,” McIsaac said in a recent interview. “You better believe the incumbent manager is going to pull out all the stops.”

T. Rowe Price Group has a similar partnership arrangement with DST Systems and now counts around $7 billion in assets from 401(k) and similar plans with under $20 million, up from $5.3 billion at the end of 2012.

The increase reflects both market gains and new outreach. Kevin Collins, T. Rowe Price’s head of sales for the area, said it has shifted resources to pitch more financial advisers who create the small-business plans. Many are surprised to even hear from his company, Collins said, but like McIsaac he said the smaller plans are an easier pitch.

“The providers are looking to go where the growth opportunity is,” Collins said.


To be sure, the small-businesses plans represent paltry sums for many asset managers. Vanguard in total managed $2.55 trillion in U.S. mutual fund assets as of March 31.

A factor helping Fidelity gather small-businesses assets is that about seven year ago it allowed retirement-plan administers to offer non-Fidelity funds. Vanguard made a similar change only in 2012.

Signing up small companies can pay off for the fund administrator when a company grows. One Fidelity client has been Facebook Inc’s 401(k) plan, which held $24 million in 2010 and $72 million in 2012, the year of its latest filings.

One new client of the Vanguard-Ascensus partnership is Lintons Managed Services, a Pennsylvania food services provider, with a $1.7 million 401(k) offered by with about 75 participants.

Linton’s plan administrator, Maureen Modestine, said fees are about 20 percent lower than before, when the plan was run by a payroll-processing company. She credits an adviser who found the new plan, Scott Race of Simon Financial Group in Bala Cynwyd, Pennsylvania. He said many small companies pay too much.

“I go to business X, and I walk out the door scratching my head, I can’t believe they have taken on having a 401(k) plan,” he said. (Reporting by Ross Kerber; Editing by Linda Stern and Leslie Adler)

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