In response to feedback from banking companies and other financial intermediaries, Fidelity Investments has overhauled its adviser-sold 401(k) retirement program, allowing plan sponsors for the first time to offer employees a menu of products that does not need to include any Fidelity-managed mutual funds.
Over the years the Boston fund mutual company, which has a total of $1.5 trillion of assets under management, has opened its decade-old Advisor 401(k) program gradually to allow outside investment managers on to sponsors' fund lineups.
But it accelerated the process Jan. 1 by eliminating the requirement that at least half the funds in plans' lineups be Fidelity mutual funds, said Lisa Smith, the senior vice president with Fidelity Investments Institutional Services who runs the program.
The changes, which include both adjustments in pricing and increased flexibility in retirement plan design, "are our most significant enhancements since 1998," she said.
Now financial advisers can offer employers any combination of funds from Fidelity or other providers. Fidelity's platform includes more than 1,000 mutual funds in over 30 nonproprietary families.
When asked if it is less expensive for employers to offer a platform with Fidelity funds versus nonproprietary ones, Ms. Smith said that the mutual fund lineup that an employer offers "will be a variable in our pricing."
A Fidelity spokesman said that the changes to the Advisor 401(k) program are aimed at giving advisers a leg up and a degree of flexibility in an "increasingly competitive marketplace."
Pat Burke, a senior vice president of the benefits consulting arm of First Niagara Financial Group Inc. in Lockport, N.Y., said that Fidelity made the enhancements because of increasing price competition and demands from employers for a more diversified mix of investment choices and increased flexibility in the design of retirement plans.
The 401(k) industry is "changing pretty dramatically," said Mr. Burke, whose unit has 60,000 401(k) participants and $1 billion of retirement plan assets under management.
Employers' demands began to ratchet up after the enactment of the Pension Protection Act of 2006, which opened a slate of new responsibilities and opportunities in the 401(k) arena, Mr. Burke said.
Financial intermediaries such as First Niagara have benefited in the last few years from a shift among providers toward using middlemen rather than selling directly to employers, he said.
"It seems like all the financial services companies have realized that financial intermediaries can provide significant value," Mr. Burke said.
Alois Pirker, a senior analyst with the Boston research firm Aite Group LLC, said that fund companies in general have been slow to shift to more open architecture and flexible 401(k) plans.
However, other investment management companies are likely to follow Fidelity's lead to create more broadly open architecture platforms, he said. "We are slowly leaving the time behind when investors just have to buy whatever they're presented with."
Ms. Smith said that Fidelity eliminated the requirement of including its mutual funds in reaction to feedback from financial intermediaries, including banking companies, that set employers up with the plans
Asset growth in the adviser-sold 401(k) program has been strong, she said. The Advisor 401(k) assets, for which Fidelity is the record keeper, rose 31% last year, to $22 billion at yearend, according to the company.
Mr. Pirker said the changes suggest that Fidelity's adviser-sold 401(k) business is becoming more independent from the company's core fund management business.
"Fidelity has traditionally been seen as a business with mutual funds at the core, and the distribution channels — retirement, brokerage, and registered investment advisers — were all neatly tied back to the mutual funds," he said.
Among the enhancements, Fidelity has consolidated its Advisor 401(k) offering aimed at employers with 100 or more plan participants with its offering for smaller businesses. As a result, small employers will have access to more services and features, which include access to company stock and a self-directed brokerage option within the plans.
In addition, Fidelity has instituted a custom pricing model for the platform and eliminated its bundled price options. Now a plan's price is determined by factors such as its size, the number of participants, services, and features, and the selection of investment options.
According to Ms. Smith, the changes are meant to ensure that employers do not pay for features they are not receiving from their plan.
Mr. Pirker said that one of the strategic advantages of offering a fully nonproprietary mutual fund lineup is that it decouples the Advisor 401(k) program's success from the performance trends of the company's in-house investment offerings.
"It opens up the retirement base as a much more stand-alone business, rather than just a distribution channel for Fidelity funds," he said. "I think it's a smart move. You don't want to be dependent on [your own] fund performance."
