3D PARTY NOSES UNDER 401(K) TENT: BACK-OFFICE PAPER-PUSHERS WANT PIECE OF ADVISER BIZ

Watch out, advisers. Look who’s moving in on 401(k)s.

Regional third-party administrators — after years of being severely squeezed while Fidelity Investments, Vanguard Group and other big providers of so-called bundled 401(k) plans snatched away their core but low-margin record-keeping business — are fighting back by registering with the Securities and Exchange Commission to provide investment advice to plan sponsors.

These local record-keepers, known in the business as TPAs, are hiring advisers to target vastly underserved smaller plans — those with 500 participants or less.

The problem is that traditionally TPAs have gotten 401(k) referrals from advisers and vice versa. Now that TPAs are providing investment advice, financial planners may view them as a competitive threat.

Charles Schwab & Co., which plans to roll out a TPA referral effort, might also get a cool reception from advisers who clear trades through the firm. After all, many were up in arms when the discount brokerage began offering mutual funds a few years back, fearing the giant was invading their turf.

Of course, fee-based advisers have largely steered clear of the small plan market, opening the door for TPAs.

Many have struggled with serving 401(k)s profitably, and it’s a lot easier, and more lucrative, attracting and serving individual clients.

Bob DiMeo, an adviser in Chicago who runs nearly $5 billion, mainly for 401(k)s, says advisers used to dealing with individuals have no idea how much work is involved in advising a plan sponsor — or how low the asset-based fees are.

“They’ll be in for quite a surprise: how labor-intensive (401[k]s) can be,” he says. “I talk to brokers at conferences, and they say, ‘Wow, $3 billion at 1%!’ It’s not that world at all.”

Typical asset-based fees for DiMeo Schneider & Associates, run from 10 to 25 basis points. Boston-based consultant Cerulli Associates Inc. estimates that registered investment advisers have no more than 10% of the 401(k) advice market for pla
ns with 500 participants or fewer.

Just 32% of businesses with 100 to 500 participants had 401(k) plans as of 1995; that number is expected to rise to 40% by the year 2000, says Cerulli. For smaller plans, the need is greater: More than three-quarters of businesses with fewer than 100 employees don’t offer a 401(k) plan.

Enter the regional retirement-plan record-keepers, whose plight is considerably bleaker than the typical adviser’s. From Wespac Plan Services in Oakland, Calif., to Emjay Corp. in Milwaukee, to Milliman & Robertson in Seattle, a growing number see investment management fees — even the comparatively paltry ones paid by 401(k) plans — as a key to boosting revenues and profits. While an individual might pay a fee-based adviser 1% of assets under management, small plans might pay a fraction of that — say, 10 to 50 basis points.

“I think it’s a natural place for some of the TPAs to turn to, as they’ve lost some of their bread-and-butter share to the larger providers,” says Karina Istvan, a consultant with Cerulli Associates. “They’re honestly looking for a way to survive.”

cheap and easy

The handful of TPAs offering advice have either hired one or two people to provide it or bought asset allocation software.

After all, the thinking goes, how hard is it to hire an investment adviser or two to pick several mutual funds and educate the participants? Some are even providing their own rudimentary asset-allocation services to participants.

“It’s relatively easy to increase the revenue on the investment-advisory side without too much hassle,” says John Williams, senior analyst with California’s Wespac Plan Services.

Mr. Williams heads third-party administrator Wespac’s recent move to offer investment advice. Wespac picks funds, educates participants on the options, offers four asset-allocation models through an alliance with Oaks, Pa.-based SEI Investments Co., and rebalances portfolios each quarter.

The firm also assumes fiduciary responsibility, a major s
tep that opens it up to potential liability. And Wespac is clearing trades through discount-brokerage giant Schwab, which also hopes to get a piece of the action as a growing number of TPAs become advisers.

Schwab is putting together a referral network of regional third-party administrators for companies whose retirement plans Schwab can’t handle profitably with its own bundled service, which is geared to larger plans.

Schwab plans this spring to begin rolling out its new 401(k)Source on a pilot basis in four of its regions — California, the Great Lakes (Indiana, Ohio and Minnesota), the Northeast (Maryland and Pennsylvania) and the Southeast (Georgia, Mississippi, North Carolina and Tennessee). The company hopes to begin expanding the network to the rest of the country by yearend.

Ben Brigeman, a Schwab senior vice president for retirement plan services, sees more regional record-keepers getting into the advice business. “Certainly, it’s more lucrative if they can have that fee-based income through the door. But there’s also a need in the (small plan) market.”

‘it’s pretty cutthroat’

Tri-ad Actuaries Inc. in Escondido, Calif., was an early starter, establishing a separate registered-investment-adviser unit three years ago.

“Our competitors always are going to be able to throw more money at technology,” says Tri-Advisers unit head Bud Green. “We have to offer personalized service.”

But some TPAs worry that offering their own investment advice might deter financial planners from referring 401(k) business their way. Such referrals account for 20% to 30% of the business at Arlington Heights, Ill.-based Administrative Management Group.

“It wouldn’t kill us if even half of those (referrals were lost),” says Mark Tucker, director of business development. “But we’d notice it.”

Still, narrowing record-keeping margins are persuading firms like Administrative Management to at least consider the advice business.

“It’s pretty cutthroat,” Mr. Tu
cker says. The mutual fund companies “have got the assets. They’re trying to at best break even (on administrative costs) and if they lose a little, that’s OK. We’re all trying to play the same game. Now, we’re saying, ‘All right, we’ve got to do something.’ “