The 401(k) business is undergoing a shift, with more asset managers deciding to exit the administration and record keeping side.
That could put more business in the hands of third-party administrators, firms that specialize in tasks such as keeping track of assets and sending out quarterly statements.
"We think as people focus on what is most important to them and what they make money on, there will be a trend toward outsourcing the back- office operations," said Dennis Sheehan, chief financial officer of Bisys Group Inc. The Little Falls, N.J., firm works with 6,616 plan sponsors, making it one of the bigger 401(k) administration and record-keeping operations.
"I definitely see there's an opportunity in that for companies like Towers Perrin," said Don Biron, director of business development for the Valhalla, N.Y., firm, another big 401(k) service provider. The company declined to say how many clients it has.
Metropolitan Life Insurance Co., New York, plans to "aggressively ratchet up" its marketing in light of the increased opportunity, said Gary Lineberry, senior vice president for the defined contribution group at Met Life, another record keeper and administrator.
In April, Van Kampen American Capital, Chicago, announced plans to exit 401(k) record keeping and administration. United Asset Management Corp., Boston, followed suit last month.
They are among the companies that have concluded that it is hard to make money on administration and record keeping unless they are done on a very large scale. Both companies will continue to manage 401(k) assets and provide administration and record keeping until the end of the year.
Plan sponsors that used the companies for administration and record keeping will have to line up other providers for those services.
Money management is more profitable than back-office services, and more cost-efficient. The cost of managing $1 billion or $2 billion is virtually the same, whereas record-keeping costs increase with every new plan participant, said Paul Kampner, president of T Mark Associates Ltd., a consulting firm in Chicago.
"I think you'll see people reexamining their business and saying, 'What business are we in?'" he said.
No exact figures are available for how big the 401(k) servicing market is. But a plan sponsor with 1,000 participants and $30 million of assets under management pays about $60 per participant per year, said David Huntley, a principal at HR Investment Consultants, Baltimore.
Mutual fund companies made a big push into the defined contribution business starting about 1990, capitalizing on technological edges such as their ability to provide fresh account information and reallocate participants' assets daily.
The fund companies provided administrative services free or at little cost, coming out ahead thanks to fees they earned from managing retirement accounts.
At the time, banks, insurance companies, and other providers could not give the same level of service.
They have since closed the technology gap.
Industry watchers say that Van Kampen and UAM-medium-size players in the 401(k) business-are the kind of firms that are likely to "unbundle" asset management and back-office functions.
Larger companies, such as Fidelity Investments and Vanguard, will be better able to endure as competition forces down fees on record keeping and administration.
"In the last five years, it's become a service that is almost given away," said Mark Naber, managing director of the Optima Group, a consulting firm in Fairfield, Conn.
Another factor contributing to a likely unbundling trend: As the stock market comes back down to earth, mutual fund assets are growing more slowly or even declining. As a result, management fees are taking a hit.
That means that the money management side of a company's 401(k) business will not be able to continue subsidizing the administration side.
"Administration is going to have to stand on its own," said Mr. Kampner.
That may be just as well. Over the last three years, plan sponsors have increasingly sought to offer multiple mutual fund families to their participants.
They are getting multi-manager platforms through fund companies, banks, and brokerages, said Andrew Scherer, vice president and director of qualified plans for Van Kampen.
Given that a single fund company is less likely to be the sole mutual- fund provider for a given sponsor, it no longer makes sense to throw in back-office services, Mr. Scherer said.
"This approach allows us to focus on our core competency, which is asset management," he said.