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 Since 2012, the Malvern, Pennsylvania-based fund firm has quadrupled
to roughly $4 billion the assets it administers in retirement plans
holding less than $20 million in employee savings -- a market it
once dismissed as a backwater.
Vanguard joins rivals like T. Rowe Price Group Inc in putting a new
emphasis on the micro-plans. Both trail Fidelity Investments, the
sector's bigfoot with $94 billion in assets from smaller companies.
The newfound interest reflects how the largest corporate retirement
plans are either locked up or bargaining hard on fees, while many
smaller companies have room to cut their costs and are under
pressure to do so.
Among 20,000 plans with less than $20 million in assets tracked by
BrightScope Inc, total costs averaged 1.18 percent in 2012 -- more
than three times the total average costs of 0.33 percent for top
corporate plans with more than $1 billion in assets.
Small companies are "where the worst plans are today," said Mike
Alfred, BrightScope's chief executive. Since 2012, 401(k) plans have
been required by the U.S. Department of Labor to clearly disclose
fees to employees.
Company 401(k) plans, combined, held $3.7 trillion at the end of
2013, according to research firm Spectrem Group, up from $1.9
trillion in 2008. Of that, about $700 billion was in plans with
fewer than 100 participants.
The money is widely scattered and just finding it takes work. In
Lewisburg, Pennsylvania, Annette Camuso-Sarsfield, human resources
director for Playworld Systems Inc, a recreational equipment maker,
said she gets a call a month from financial representatives looking
to run her $18 million plan, twice the rate of a few years ago. She
hasn't changed plan administrators in recent years, but does review
plan mutual funds and fees in order to remain competitive.
Vanguard began its small-business outreach in 2011, aiming to run
the 401(k)s with the help of closely held Ascensus Inc, which runs
websites and administrative services for the retirement vehicles.
Vanguard Managing Director Chris McIsaac said the effort reflects
how low-fee Vanguard can underprice competitors -- and how it is
harder to win new business from the largest corporations.
"It's a mature marketplace," he said. Signing up a big client
"basically means you have to pry that relationship away from an
incumbent manager," McIsaac said in a recent interview. "You better
believe the incumbent manager is going to pull out all the stops."
T. Rowe Price Group has a similar partnership arrangement with DST
Systems and now counts around $7 billion in assets from 401(k) and
similar plans with under $20 million, up from $5.3 billion at the
end of 2012.
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The increase reflects both market gains and new outreach. Kevin
Collins, T. Rowe Price's head of sales for the area, said it has
shifted resources to pitch more financial advisers who create the
small-business plans. Many are surprised to even hear from his
company, Collins said, but like McIsaac he said the smaller plans
are an easier pitch.
"The providers are looking to go where the growth opportunity is,"
Collins said.
SIGNING UP FOR GROWTH
To be sure, the small-businesses plans represent paltry sums for
many asset managers. Vanguard in total managed $2.55 trillion in
U.S. mutual fund assets as of March 31.
A factor helping Fidelity gather small-businesses assets is that
about seven year ago it allowed retirement-plan administers to offer
non-Fidelity funds. Vanguard made a similar change only in 2012.
Signing up small companies can pay off for the fund administrator
when a company grows. One Fidelity client has been Facebook Inc's
401(k) plan, which held $24 million in 2010 and $72 million in 2012,
the year of its latest filings.
One new client of the Vanguard-Ascensus partnership is Lintons
Managed Services, a Pennsylvania food services provider, with a $1.7
million 401(k) offered by with about 75 participants.
Linton's plan administrator, Maureen Modestine, said fees are about
20 percent lower than before, when the plan was run by a
payroll-processing company. She credits an adviser who found the new
plan, Scott Race of Simon Financial Group in Bala Cynwyd,
Pennsylvania. He said many small companies pay too much.
"I go to business X, and I walk out the door scratching my head, I
can't believe they have taken on having a 401(k) plan," he said.
(Reporting by Ross Kerber; Editing by Linda Stern and Leslie Adler)
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