The Vanguard Group Inc. has stepped boldly into the small-pension-plan bundled-provider fray. But the index specialist will face stiff competition from life insurers, many of whom are already well-established in the space.
Vanguard on Wednesday said it will act as a 401(k) provider to plans with less than $20 million in assets, launching its services in the fourth quarter. Small companies will be able to get funds, participant education and other services through the arrangement. Record keeping will be provided by Ascensus Inc., an administrator in the small-plan arena.
“We've been getting over a thousand leads a year in a business we're not even serving right now,” said Barbara Fallon-Walsh, head of Vanguard's record-keeping business. The firm has been referring that business out to third-party administrators.
Ms. Fallon-Walsh said she wouldn't be surprised if Vanguard began adding on 1,500 plans per year. The firm isn't sharing details on the fees for the program, but it expects the all-in fees to be among the lowest in the industry.
Still, Vanguard has its work cut out for it. The small-plan space remains dominated by insurance companies and third-party administrators. Major players include The Hartford Financial Services Group Inc., John Hancock Financial Services Inc. and Principal Financial Group.
Distribution will be a pivotal point for Vanguard's expansion, as life insurers have a substantial leg up in distribution among small retirement plans, said Elvin Turner, managing director of Turner Consulting LLC.
Vanguard's management expects to the fund firm to sell directly to small plans, as well as to fee-only registered investment advisers. Mr. Turner noted that the universe of advisers who are dually registered is much larger than the fee-only camp, but Vanguard's brand could help it gain traction with small-business owners.
“The issue is getting to that small-business owner and that's where distribution is key,” Mr. Turner said. “It's going to have to be some kind of innovative distribution going forward — and they can't do that without feet on the ground.”
He added “The small-plan bundled market is the last bastion of the insurance companies' dominance in retirement plans,” Mr. Turner added.
Further, Vanguard expects that its low fees will give it a competitive advantage, even in an era where the Labor Department is calling for greater transparency. “The thought here is that fee-only advisers are interested in exploring their options as far as fee disclosure speculation plays out,” said Kathy Fuertes, head of Vanguard's retirement plan unit for small businesses.
“The low-cost move will be attractive now, especially with the market being all over the place,” said Lynette DeWitt, director of subadvisory and life cycle fund research at Financial Research Corp. “Fee reduction will be more important because of the lack of alpha.”
