Fleet Financial Group is targeting small businesses with an alternative to a traditional 401(k) program-a group annuity.

Galaxy(k), which is underwritten by American Skandia, is being marketed to companies with fewer than 75 employees or less than $1 million in annual revenues. A group annuity meets the needs of these companies better than other available products do, Fleet executives said.

"Part of the problem with a mutual-fund-type offering is it's very difficult to be profitable, and many of them are not set up to have choices of products for the small market," said Linda Goodwin, marketing director for Fleet Investment Management.

Fleet unveiled the product late last year and is close to signing up 10 companies.

Galaxy(k) offers annuities that invest in eight fund families, including the Boston-based banking company's Galaxy Funds. It has a 140-basis-point wrap fee to cover broker and administration fees, in addition to the fees in the underlying annuity investments. Unlike an individual annuity, surrender charges in this product apply only if the plan sponsor withdraws from the plan.

Insurer sales of mutual funds and group annuities account for 25% to 30% of all 401(k) assets, said Paul F. Sullivan, pension consultant with Limra International, a Windsor, Conn.-based insurance industry trade group.

Mr. Sullivan said such hefty fees are not unusual. Because 401(k) margins are typically so slim, serving companies with fewer than 50 employees is a real challenge, he said.

Just how tight are margins?

"How do you pay (a broker) to get in a car and go from Brooklyn to Queens if they have to pay a toll?" Mr. Sullivan asked.

A group annuity such as Galaxy(k) can cover distribution expenses, said Bayard Tracy, national sales manager financial institutions for Shelton, Conn.-based American Skandia.

"If we didn't have an ability to pay the broker for his time, the (small-business) individual would likely not have a plan at all," Mr. Tracy said. "The small-business market has been underserved on the retirement planning side and by the banking industry."

Selling retirement plans to this segment is a time-consuming process, but Fleet, with more than 350,000 small business customers, expects that it will be successful. The goal was to offer smaller companies products beyond simplified employee pensions and Keough Plan Accounts, said Anne Christopulos, vice president of marketing at Fleet.

American Skandia's proposal is attractive for a number of reasons, Fleet said, not least because it includes reputable underlying fund families, including T. Rowe Price and Janus.

American Skandia also subsidizes record-keeping and administration fees annually by paying 20 basis points on each plan's invested assets.

To reduce any costs for plans switching to Galaxy(k), American Skandia pays up to 2% of any surrender charges or fees.

Such features may be tantalizing to small businesses, said Peter Starr, a consultant with Cerulli and Associates. But a mutual-fund-based product is a better deal, because it does not have the hefty wrap fee, he said.

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