When Signet Banking Corp. decided to market retirement plans to small businesses, it had to make a hard choice.

Should the bank try to develop a program in-house and possibly miss a lucrative window of opportunity or should it look to a third-party provider to get a jump on the competition?

The Richmond, Va.-based bank chose to get into the market as quickly as possible by hiring Kemper Financial Services and using its small business 401(k) plan.

"We saw this as a fast track opportunity before the window of opportunity closed," said Brad Connard, vice president of marketing and analysis for the small business group at the $10.8 billion-asset bank.

At stake is a market that is expected to grow from $70 billion in plan assets at yearend 1994 to $160 billion by 1999. With predictions that the number of plans will grow 50% over the next five years, banks are scrambling to get their fair share before they lose the market to competitors ranging from banks to the very companies they hire as partners.

Signet's use of Kemper's 401(k) program illustrates the trend of small business bankers going outside their own trust department to develop retirement programs - and a lucrative fee-income stream - for their small business clients. The reason for looking outside the bank: cost savings.

Windsor, Conn.-based Access Research Inc., a marketing consultancy, said small companies have four needs in a retirement program. They want a sophisticated yet easy-to-understand plan that is inexpensive and handled locally.

"There is a preference for ease of administration in this group," said Jeff Close, a spokesman for Access Research. "That is because, in most cases, you're dealing with a person who is the president of the company and who has considerable responsibilities besides looking after the retirement plan."

As a result, most plans sold to this market are bundled to include investments, record keeping, and administration, which is handled through one contact person that the employer, or plan sponsor, must deal with.

For banks using these packages, the bonus is in the savings. Instead of spending heavily on technology and people to perform the tasks in-house, the bank merely trains its sales force to sell a new product. Everything else is handled by the provider.

But the greatest benefit to a bank may be that a third-party avoids internal strife that many small business bankers face in trying to work with departments that view them as competitors.

Gregory LaMothe, senior consultant with Action Systems, a Dallas-based consultancy, said relationship managers are often unsure whether 401(k) plans are handled by the trust department or the investment products division. Further, departments often compete for the opportunity to cross- sell products because their efforts are not coordinated.

Mr. LaMothe tells of one large bank whose trust department handled its 401(k) program. The head of the investment arm asked his counterpart at the trust department to ask the plan sponsor if his staff could talk to participants about the investment options and tax implications at the time of withdrawal from the plan.

"The trust department wouldn't do it," said Mr. LaMothe. "The fact that they were reluctant is an example of how bankers think of their own lines first and get in the way of expanding the small business relationships for the bank."

Tom Johnson, vice president and director marketing and sales at Federated Retirement Plan Services in Pittsburgh, said the desire to handle the market in-house is something that many big banks cling to.

"We ask the heads of these banks if they are trying to build revenue, or do they want to have a process shop," said Mr. Johnson. "Strangely enough, a lot of small banks have a better answer to that than the big banks."

Mr. Johnson advocates dividing the labor along the specialties of different groups.

For instance, he estimates it takes around 100,000 participants and good growth prospects to justify an in-house back office. Most banks cannot generate this volume of business from their own limited markets, leaving the task better handled by specialists.

Similarly, he believes that an investment company has an edge in developing new products tailored to the small business market. However, Mr. Johnson says banks have unique access to the customer.

"I'm of the bias that says banks have a huge competitive opportunity," he said. "In the local community, they're the foot soldiers and can leverage these relationships better than anybody."

By adopting this blueprint, he estimates a bank can earn as much as 100 basis points on assets for a small business plan. This compares with the 25 basis points to be earned on a 401(k) plan aimed at large companies with millions of dollars in assets.

Banks and others are apparently catching on to the value of using a third-party provider. Access Research estimates that the use of third-party administrators in the small 401(k) market has jumped from 17% in 1990 to 22% at yearend 1994.

There are some competitors, however, whose nationwide marketing capabilities give them the economies of scale to design, develop, market, and administer a 401(k) plan on their own. That includes some superregionals, but more often includes specialized nonbanks that are increasingly focusing on all aspects of the small business market.

Merrill Lynch & Co. is perhaps the most revered example. Even though it has a national focus, its network of financial consultants match a banks' local edge in marketing retirement planning.

"The client begins the relationship with the local financial consultant, supported by a retirement plan consultant," said Barry M. Gross, director of retirement plans and investment services with Merrill's Business Financial Services. "Service can be construed as very localized. That is the highlight of our delivery system."

Since Merrill markets only through its consultants, some believe the brokerage may be missing a broader opportunity. After all, Access Research says banks still control roughly 32% of the market, though that is down from 35% in 1990.

Other competitors are pursuing a dual strategy of marketing to small business through banks and independently. One such company is Boston-based Fidelity Investments.

"It's probably the segment with the greatest potential for our clients," said Dave Liebrock, executive vice president with Fidelity's Institutional Services Co. "If you look at banks and the relationship they already have with small business, this is the perfect next step in that relationship."

But the company still aggressively markets plans independently. One West Coast banker notes that Fidelity uses direct mail and targeted advertising to go after his customers. "If I were using these guys I wouldn't feel too good about picking up the Sunday newspaper and seeing their ad offering my customers a chance to circumvent me," the small business banker said.

Signet uses similar techniques to reach prospects. The bank has a four- pronged sales effort that includes marketing 401(k) plans through direct mail, newsletters, and telemarketing. Salespeople from the bank's brokerage arm work with a relationship manager to close the deal.

So far, Gary Klein, executive vice president of Signet's small business group, is pleased with the early results.

"It has allowed us to cover a lot of territory very quickly," said Mr. Klein. "It's a fairly unique approach to going after this market, compared with the one-on-one trust company approach."

Mr. Connard of Signet said nearly all the bank's competitors are trying to serve the small business market with some form of in-house arrangement. As a result, he says, they are having trouble competing with Signet.

Like others, the bank has found that 401(k) is good for cross-selling and also a good way to attract new customers that can be sold other fee- income-producing services.

"We've got a product geared specifically for the needs of small businesses," said Mr. Klein. "We were great at delivering products, but not so good at satisfying needs. Now we're trying to understand what the customer wants before we build the mousetrap."

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