For years, industry observers have seen the growth of the 401(k) industry as the beginning of the end for defined benefit plans. But executives at Wachovia Corp. and Fidelity Investments say their companies view such pension plans as an underserved market and see opportunities for growth even if 401(k)s remain the retirement product of choice.
Joseph Ready, the director of the Wachovia Retirement Services unit of the Charlotte banking company, said his operation, like others, has had "an intense focus on the 401(k) market over the past 10 years but we think the DB (defined benefit) market is underserved. Companies that typically have 500 to 10,000 employees - the upper small to midsize market - are underserved."
Wachovia is reaching out to that market, said Mr. Ready.
Wachovia Retirement has $65 billion of retirement assets under management, Mr. Ready said, with these assets split almost evenly between defined benefit and defined contribution plans.
Robert L. Reid, an executive vice president and the director of Wachovia's strategic retirement initiative, said in December that developing small-business relationships, increasing IRA rollovers, and creating advisory business with customers could increase Wachovia's retirement assets by 9% to 12% annually for up to 10 years.
"The defined benefit business is going 8% to 9% annually," he said then. "We want to maintain pace and exceed what others are getting from this market. We want to enhance our market share. That is our overarching objective."
To develop defined benefit business, the retirement unit needs to intensify its focus on companies with up to 150 employees, Mr. Reid said. From 90% to 95% of midsize and large companies already have retirement plans, he said, but small businesses are potentially a growth market.
There have been more opportunities in the small and midsize 401(k) plan market as well, Mr. Ready said. "In the middle market, you see more consolidation and turnover. And with plans with up to 100 employees, you see more new plan formation," he said.
Wachovia Retirement said last month that it is expanding services to emerging businesses with 401(k) plan assets in the $500,000 to $3 million range. Smaller retirement plans will have access to more investment choices, including Wachovia's AdviceTrak managed account option.
Financial Research Corp. has estimated that assets in small-business retirement plans would reach $120 billion by 2012, from $3 billion today.
Guy Patton, the president of Fidelity Human Resources Services Co., a unit of the giant mutual fund company, said, "DB is not a bundled sale today." Many plan sponsors want the flexibility of working with multiple managers, he said.
Asked whether Fidelity emphasizes defined benefit or defined contribution products, Mr. Patton said, "Both of those markets from a business perspective are mature markets. There are very few plans in the large market creating DC plans, and no one is creating new DB plans."
"We're newer to the DB administration game than DC," he said. "When the world began, we were in the asset management business. In '94, we got into the DB market."
Fidelity reported record assets Thursday in its retirement, pension, human resources and benefits business - $729.9 billion under administration. This is a 14.9% increase from the $635.3 billion at the end of 2003.
Fidelity's defined contribution business had $647.6 billion of assets at Dec. 31, up 13.8% from the year earlier. Its defined benefit business grew 20.8%, to $102.4 billion, in the same period. The company won $9.7 billion of defined benefit mandates from clients, including the Washington State Investment Board and the Oregon Investment Council.
Mellon Financial Corp.'s human resources and investor solutions business, however, says it sees more activity and opportunity for growth in the 401(k) sector.
Patrick Sheppard, the chief operating officer at Mellon Institutional Asset Management, said that while the company had focused on the pension business in the past, there are fewer DB plans being created and more opportunity for growth in the 401(k) market. "We are targeting the mid-sized companies and are also targeting our subadviser relationships," he said.
Mr. Sheppard said that the big opportunities for Mellon lie in core equity products. "We're also seeing a little more demand for individuals that want to match their retirement date. There's more interest in lifestyle funds," he said.
Mellon, which has $770 billion retirement assets, including $535 billion on the institutional side, offers investment-only and subadvisory services to defined contribution plans, said Mr. Sheppard.
It was ranked the third-largest 401(k) plan administrator of 2004 by Business Insurance magazine; it keeps records for about three million participants.
Investors' appetites for alternative investments are also on the upswing, said Mr. Sheppard. "The challenge is the sophistication and education level of the client base."
Banks and fund companies are entering relationships to enhance their product offerings by outsourcing certain services to firms with expertise in a given area.
Mellon announced last month that it formed a partnership with Financial Engines Inc. to offer 401(k) plan investors a portfolio management program.
The program, Personal Asset Manager, lets plan participants delegate specific investment decisions to professional managers. Each participant account is to be personalized based on age, savings information, and current investments. Participants are also to get access to investment advisers through a call center.
Fidelity Investments announced last April that it had signed a seven-year contract to provide administrative services for Bank of America Corp.'s human resources operations, payroll, and benefits programs.
It began providing similar services this year to the former FleetBoston Financial Corp. operations that Bank of America is integrating after buying the parent company last year.
