Fidelity Investments has snared a potentially lucrative endorsement to market retirement plans to more than 200,000 small businesses nationwide - but it could be rough going.

Though demand for retirement services is rising dramatically at companies with fewer than 100 employees, the sector is notoriously difficult to serve profitably.

The reason: smaller companies have fewer employees to shoulder the costs of maintaining and administering retirement plans. Service providers can slash those costs by offering turnkey plans - but in doing so, they risk turning off small-business owners who want personal attention.

"There's a fallacy out there that retirement plans for small businesses are very simple," said Robert Gordon, senior vice president of NationsBanc Advisors Inc., a money management unit of NationsBank Corp. "These plans require the same level of consultation and discussion with a business owner that is involved with a larger plan."

Mr. Gordon said he has seen research showing that 17% of small-business owners switch retirement plans each year, chiefly over dissatisfaction with service quality.

Not that anyone is dismissing the potential in Fidelity's deal with the U.S. Chamber of Commerce. The endorsement, announced Tuesday, gives the nation's largest mutual fund company unprecedented exposure to businesses with fewer than 100 employees - 90% of which lack retirement plans, according to Access Research Inc., Windsor, Conn.

"Everybody is attempting to get at this market. Fidelity has found a novel approach," said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I.

That includes banks, which see providing retirement services to small companies as a natural extension of their corporate banking relationships.

The attraction, clearly, is the segment's dramatic growth. Nearly 200,000 companies with fewer than 100 employees sponsored 401(k) plans in 1995, almost double the level of 1989. Over that period, assets in these plans grew more than five-fold, to $95 billion.

Small companies are "the fastest-growing segment of the retirement plan business," said Mr. Gordon of North Carolina-based NationsBank.

Boston-based Fidelity is already one of the largest managers of retirement plans, with $171 billion under management. But only a sliver of those assets - $12 billion - comes from participants in retirement plans sponsored by businesses with fewer than 1,000 employees.

Such plans - the most common of which are called 401(k)s, after the section of the Internal Revenue Code that authorizes them - enable employees to earmark a portion of their salary for retirement savings. Contributions and investment earnings are sheltered from taxation until they are withdrawn upon retirement.

Retirement plans have traditionally been expensive for small businesses to provide - ranging between $5,000 and $10,000 a year, according to the chamber.

Because Fidelity has the scale to squeeze down costs, "that speaks to an opportunity right there," said William Thompson, executive vice president in charge of marketing for Fidelity's emerging corporate markets division. Fidelity will begin its sales push in the summer.

Still, some of the biggest players in the 401(k) plan business have steered clear of small companies.

In order to serve small clients efficiently, "you have to adopt a cookie-cutter approach," said Theodore A. Miller, a principal at State Street Global Advisors, a unit of State Street Boston Corp. He said companies have to be willing to turn down business that is "administratively and legally complex."

John Kimelman and Howard Kapiloff contributed to this report.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.