Five years after Citigroup Inc. and State Street Corp. started CitiStreet, a joint venture retirement services business, it plans to continue developing assets by going down-market, its brand-new chairman and chief executive officer said Wednesday.
Phil Lussier succeeds James S. Phalen as head of the Quincy, Mass., venture in a move announced Tuesday that sends Mr. Phalen back to the Boston parent company March 1 as an executive vice president and head of the newly created North American investment servicing group.
Mr. Lussier, who was president of retirement services at CitiStreet, said it has generated strong returns for both parent companies. CitiStreet had $184 billion of assets under administration at Dec. 31, 2001, and $216 billion last Dec. 31. He expects 10% to 12% annual growth for the next five years, Mr. Lussier said.
This growth and a new focus on small and middle-market businesses should generate a lot of cross-selling opportunities for both Citigroup and State Street, he said. "We have always provided strong cross-selling with our parents, and we will continue to provide products into their distribution channels," he said.
When CitiStreet was announced in December 1999, it was expected to give State Street's products access to Citigroup's vast retail network. The venture, which combined State Street's Boston-based retirement investment services unit and its Jacksonville, Fla.-based Wellspring Resources subsidiary with Citigroup's Copeland Cos. subsidiary in East Brunswick, N.J., gave both parents access to new customers.
Asked about CitiStreet's longer-term status, Mr. Lussier said, "This joint venture will remain intact. It has been a very successful business venture for both companies."
Calls to both Citigroup and State Street were not returned.
CitiStreet has 3,000 employees and has developed business with 150 large institutional clients and 12,000 small businesses. Its customers include Sears, Boeing, and Honeywell; 12 states, including Texas, Florida, Michigan, and Ohio; and both its parents.
Mr. Lussier said the company plans to expand by looking down-market. CitiStreet will begin to outsource retirement products and services to companies with 3,000 to 5,000 plan participants. "I think that a lot of products are outsourced effectively to companies with more than 10,000 employees, but that leaves a lot of opportunities with smaller companies," he said.
Gartner Inc., a Stamford, Conn., research and advisory firm, projects that employee benefit outsourcing will generate $29.9 billion of revenue in the United States this year. It predicted that industry revenue will reach $37 billion by 2008.
CitiStreet's larger competitors like Hewitt & Associates and Fidelity Investments have focused on selling their total retirement outsourcing platforms to corporations with more than 20,000 employees, Mr. Lussier said, but CitiStreet sees a good opportunity in offering a combined defined benefit and defined contribution platform to companies with 1,000 to 20,000 employees.
"Previously we really reserved our defined benefit administration for larger companies with 15,000 to 20,000 and more participants," he said. "That is who we built this for. But now we want to use this platform to address the middle market."
Mr. Lussier said most companies, regardless of size, want one provider that can offer a comprehensive benefits package. "As the business has gotten more complex, companies want fewer providers or a single provider who can offer them an array of services," he said.
Executives at both Hewitt & Associates Inc. and Fidelity Investments' Fidelity Employer Services Co. said CitiStreet has been a relatively inconsequential player in total retirement outsourcing. Kevin Campbell, a market strategy and development leader in Hewitt's outsourcing business, said it is focused on Fortune 1000 companies with at least 10,000 employees.
"CitiStreet is more of a benefits provider than a provider of total retirement outsourcing," Mr. Campbell said. "We typically would not see them as competition in this type of business."
Peter Smail, the president of Fidelity Employer Services, said it is difficult for companies to survive as niche players in retirement outsourcing. "It is not acceptable anymore to say we have defined benefit products or we have defined contribution plans. It is critical to offer a full suite of products," he said. "Firms have to offer everything."
Companies will be forced to develop market share, Mr. Smail said, or they will not be able to survive in the business.
"I think consolidation is absolutely something you will see more of, and the reasons are simple - this is a scale business, and those with scale will win the game," he said. "Scale is king. Only the organizations that have scale can offer customers the full suite of benefits in HR and payroll services. Only the largest companies can compete effectively."
Mr. Lussier said CitiStreet has strong market share in the defined contribution market. "Hewitt is dominant in total benefit outsourcing," he said. "Our entry into this is later than some of our competitors, but we continue to see growth there. We have high expectations we can see substantial growth through the middle market."
CitiStreet will try to continue to develop scale organically, Mr. Lussier said, and potentially through acquisitions. In 2002, it bought a back-office administration business from the Australian unit of SunGard's employee benefit systems.
Mr. Lussier sees many good opportunities in Europe and Asia.
"We want to grow into new markets, but we want to grow into markets that make sense [not only] for CitiStreet but also for State Street and Citigroup," he said. "Total retirement outsourcing is a global phenomenon. We haven't seen an opportunity that is a good fit yet for CitiStreet and its parent companies, but we are looking."
The board changed in January when Robert C. Dughi, CitiStreet's president and a director since it was started, announced plans to retire. (Mr. Phelan will remain a director.) Mr. Lussier said CitiStreet is quite stable and its board - whose 10 members are split evenly between Citigroup and State Street executives - is committed to expansion.
The parent companies have maintained this commitment as other banks quit the retirement services business. In June 2003, for example, Northern Trust Corp. sold its Northern Trust Retirement Consulting LLC to Hewitt.
Few banking companies have been able to develop a retirement outsourcing business. Mellon started its Mellon HR Outsourcing, and JPMorgan Chase & Co. offers benefit services, but Mr. Lussier said CitiStreet remains the leader among banks in the business.
"Some banks compete from time to time, but for the most part, the banks have been exiting this part of the market," he said. "The banks that compete, it appears to me, are competing on a regional basis to complement the rest of their business model."
