This content is from: Portfolio

Come together: Small-business defined contribution plans

Selling a defined contribution plan to a small-business owner can be a cumbersome process. Within the past two years, three firms -, 401Konnect and Search401k - have begun to offer online services that seek, essentially, to marry providers and brokers in the small-plan market.

Selling a defined contribution plan to a small-business owner can be a cumbersome process. In a typical scenario, a broker of stocks, insurance or other financial services persuades the company to start a plan.

By Jinny St. Goar
August 2001
Institutional Investor Magazine

The broker then has to find the appropriate service provider. After reams of proposals have been sent by overnight mail from the providers to the broker and the broker has sifted through the pile, the small-business manager signs on the dotted line.

But now the whole process can be streamlined, thanks to the advent of online services that seek to join selling intermediaries with service providers in an electronic marketplace. Within the past two years, these firms -, 401Konnect and Search401k - have begun to offer online services that seek, essentially, to marry providers and brokers in the small-plan market. The 401(k) industry hopes that these services will increase the number of small businesses that create new defined contribution plans. About 95 percent of companies with fewer than 100 employees do not have 401(k) plans, according to Boston-based research firm Cerulli Associates.

So far, none of these three online services are profitable. They hope to eventually link up enough small-plan sponsors with prospective providers to make it profitable for the providers to service such small, low-margin accounts - and in doing so generate enough revenue to make their own business models economically viable.

Through its network of 4,000 brokers, Jacksonville, Florida-based Raymond James Financial sold about 600 defined contribution plans last year, mostly conversions of existing small plans that were changing from one provider to another, as well as some new plan launches. Wirehouse brokerages compete with insurance agencies and other intermediaries to sell 401(k)s to companies, but do not service the plans once they are established.

In 2000, Raymond James collected an up-front fee of 40 to 100 basis points on all new deposits for the 600 plans, which had combined assets of $750 million. The brokerage also shares in each 401(k)'s ongoing annual fees, collecting up to 50 basis points each year, either from the provider or from the plan itself.

Several major 401(k) providers, including Principal Financial Group and Scudder Investments, have signed on with all three electronic exchanges. Scudder has agreed to provide detailed information about its services, which will be posted on the services' Web sites. In return, the Web sites funnel requests for proposals from plans that are seeking a change of providers. Raymond James brokers might contact Scudder for provider services, for example. Scudder in turn pays the Web sites for promising leads or consummated deals.

"None of the three services has been around long enough to see which one will win out," says Michael Volo, who heads the marketing of retirement products at Scudder. "So we're placing a bet on all three."

Great-West Life & Annuity Insurance Co., which has $40 billion in defined contribution assets under management, largely in the small-plan market, recently struck a deal with 401Konnect. Great-West Life gives 401Konnect basic information about its services, which 401Konnect posts on its Web site. That way, 401Konnect's phalanx of participating brokers can consult the site if they come upon a plan that seems well suited to the insurance company.

"401Konnect has already brought us a bunch of new relationships with brokers in new territories," reports Patricia Neal Jensen, Great-West Life's head of pension sales.

All three Web sites offer basic information about plan providers, including their range of services and pricing schedules. The difference between two providers might lie in the ease of access that participants have to their accounts. Comparing the costs of these different services adds another layer of complication. Hence the simplification and number-crunching services that the electronic marketplaces offer.

The three services, all launched within the last two years, aim to cut the time and effort that brokers devote to the sale of a 401(k) plan. "Having access to in-depth information saves our financial advisers the hassle of trying to gather and interpret materials on vendor products and services," says James Graham, who heads the retirement services department at Raymond James.

The online services help the brokers find the providers that will make a good fit with the 401(k) client. For starters, each electronic service has done the cumbersome work of making the providers' information more uniform and thus easier to evaluate. "A good example of information that has been standardized is the word 'participant,'" explains Eric Schneeman, president and founder of Search401k. For some providers this means any employee eligible for the company plan; to others it means only those who are actively deferring income; still others might count employees who have rolled over old account balances into the company plan.

The promised efficiencies of the electronic marketplaces could reduce the cost of sales to the providers, eliminating the least-promising requests for proposals. "We don't know all the brokers specializing in 401(k) plans," says Scudder's Volo, whose retirement services division has $14 billion in assets under management. "We hope these electronic marketplaces help us focus on the active sellers in the 401(k) business. Quite simply, we are looking to lower our cost of acquisition."

Fee structures vary. 401Konnect is free to brokers, while providers are charged an average of $150 to respond to a proposal that is funneled through the site. Search401k charges a subscription fee to both brokers and providers; brokers' fees depend on how many brokers are using the system.

Search 401k began life with $6.5 million in start-up capital: $3 million came from New York-based EuclidSR Partners, which is owned by GlaxoSmithKline; $2.2 million came from a Minneapolis firm, Sherpa Partners; and the remainder came from private investors.

401kExchange opened for business five years ago as an information gatherer, LRP Market Research, that polled plan sponsors about their perceptions of providers. "We're the J.D. Power of the retirement business," says Donald Lanman, the company's head of marketing, referring to the consumer survey company. In April of this year, 401kExchange received $3.6 million in additional funding from New York-based venture capitalists Newlight Associates. Shifting some of its energies, while maintaining its store of consumer research, 401kExchange now charges brokers to tap into its database.

401Konnect, launched in April 2000, received more than $1 million in capital from a variety of sources, including Band of Angels, the partner fund of Broadview Associates, and SBV Venture Partners. "We just closed our second round of financing," reports Art Young, who heads the company's business development department.

Search401k has established working relationships with 30 brokerage firms, including Dain Rauscher and Raymond James, but of the 30,000 brokers who enjoy access to the company's Web site, only about 9,000 actively use it. 401Konnect has 38 relationships with brokerages, including Janney Montgomery Scott, MML Investors Services and Josephthal & Co., that provide exposure to 40,000 agents, while 401kExchange claims 15 broker-dealers.

At Search401k a broker enters the specific characteristics of the plan that is looking for new services, such as the number of participants and total assets. Within a day the broker usually receives responses from several providers interested in servicing that client. And Search401k offers a bonus: It will train brokers in how to sell 401(k)s. "I'm expecting the training program to improve my brokers' productivity," says Graham of Raymond James.

"I couldn't even think about selling services to plans with less than $5 million in assets before 401kExchange," reports Al Otto, retirement services director of the Hobbs Group, an Atlanta-based brokerage that only sells retirement plans. "Now that under-$5 million segment makes up about 15 percent of our business," Otto says.

A shakeout may be looming. "The market simply doesn't need all three of these services," says Darlene DeRemer, a mutual fund consultant at New River, a financial services consulting group based in Andover, Massachusetts. Whether any of these online services will significantly boost the number of small-company defined contribution plans remains to be seen. No one doubts that small businesses are a fertile ground for future growth. But they have always been a difficult sell.

Related Content