John Bogle, chairman of Vanguard Group, is known for his frugal ways.
So it's no surprise to hear his advice to banks that want to face off with the giant mutual fund company for a share of the burgeoning business of
managing 401(k) retirement plans.
Be prepared, Mr. Bogle says, to do battle on the field of cost containment.
"If banks can provide better performance with better services at a lower price, we're going to lose every penny we have," Mr. Bogle said in an interview from the company's headquarters in Valley Forge, Pa. "But they've not been traditionally good at service."
The company has $29.5 billion of 401(k) plan assets under management. That's about a quarter of Vanguard's $117 billion book of business.
Changing Market
Banks once dominated the field in managing retirement plans, but in recent years their market share has dipped.
One reason is that the market is changing.
Defined-benefit plans, in which employers have to pay predetermined benefits no matter how investment perform, are disappearing. Managing these plans has been banks' strong suit.
Instead, defined-contribution plans such as 401(k) are sprouting up. These plans, which typically use mutual funds as the primary investment vehicles, put the burden on employees to choose their investments.
In 1992, insurance companies led the 401(k) field, managing 37% of assets, according to Access Research Inc., Windsor, Conn. Banks followed, with 27%.
Mutual fund companies, ranked third, with 24%, but were gaining market share faster than any other group.
According to a recent survey by Institutional Investor, Vanguard is the No. 3 manager of defined-contribution plans, after Fidelity Investment and Prudential Insurance Co.
Its nearest bank competitors are State Street Bank and Trust, which placed fourth, with $29 billion; and Bankers Trust Co., which tied for fifth place with Merrill Lynch, at $25 billion.
Penny-Pinchers
Tightfisted cost control is a religion at Vanguard. The company charges its customers no sales fees and its total expense ratios are the lowest in the business, according to Money magazine.
Mr. Bogle said his company hasn't had to beat the bushes for new 401(k) customers. "They come to us, by and large." Vanguard's institutional assets, including 401(k) plans, have grown 125% over the past three years, versus 90% for retail assets.
Mr. Bogle believes that in the next few years 401(k) plan assets at Vanguard will grow 35% a year, versus 25% a year for individual accounts. Investors are "looking for a mutual fund company that has funds you can get the price of in the daily paper," he said.
Costly Customers
Mr. Bogle worries about the onslaught of 401(k) business. It generally costs more to service such accounts, and the added reporting - which includes yearly tax reports for each plan - clogs computers and requires more staff. The cost per year ranges from $20 to $50, he estimated.
"It's so expensive to operate these plans on a fee basis," he said. "Just trying to cover our operating costs is hard. It's difficult to do anything for a company for under 500 employees."
Banks see the big mutual fund companies as havens for defined-contribution plans from big companies. And, in fact, Vanguard manages 401(k) plans for giants including Texaco and Federal Express.
But Mr. Bogle points out that many smaller companies, too, have Vanguard plans.
B of A's Plans
Debra McGinty-Poteet, who heads the mutual funds management business at Bank of America, said she'd rather concentrate on midsize and small companies for their institutional business.
Banks have an edge in this market because of their commercial relationships with these companies, she said.
Bank of America has $19.3 billion under management, 95% of it institutional money. Ms. McGinty-Poteet said her division is putting together a plan to attack the 401(k) market, in which it has not been a player.
"The larger corporations are choosing to deal with some fairly major competitors," she said. BankAmerica can develop a niche with companies that employ 50 to 5,000 people, she said.
"The General Electrics of the world are going to be different to deal with than the middle market," Ms. McGinty-Poteet said. "There are only so many Fortune 500 companies, but there are thousands and thousands of companies with $50 million in revenue."
Shift in Focus
But William McNabb, vice president in charge of institutional marketing at Vanguard, said banks shouldn't count companies like his out of this sector of the market.
The institutional management industry has begun a fundamental shift away from catering to plan sponsors -- that is, employers -- and toward serving the individuals invested in funds, he said.
The shift has intensified in the last two years, Mr. McNabb said. It translates into providing more personal contact, more information, more choices, and more services -- such as instant fund transfer and 24-hour phone access to fund valuation.
"Banks have been super at master trust or custody," Mr. McNabb said, "but they don't have it as part of their culture to deal with individual investors."
