Publications

March 1999

Providers Try a Little Romance Financial services firms pursue wide-open small business market

By Emily Denitto

Ken Bowe, administrative director of Blue Ridge Farms Inc., has been distracted in recent months by a recurring annoyance.

With only 130 of the firm's 500 employees eligible forits401(k) program, Brooklyn-based Blue Ridge is the kind of small operator that leading mutual funds didn't even think aboutjust a fewyears ago.Today, Mr. Bowe is frequently called by salespeople seeking the food processor's retirement fund business.

"I hear from companies constantly all the major players wanting us to invest in their products," says Mr. Bowe. "It's become a real pain in the neck."

Providers on the prowl

It may have taken awhile for them to start paying attention, but few insurance companies, banks or mutual fund groups are ignoring small businesses today. Their new focus is based on solid reasoning: The large-company market has become saturated, but 75% of firms with fewer than 100 employees have no 401 (k) plan. For those with 50 or fewer workers, only 11% have a 401(k) program.

"The sheer scope of the market is incredibly appealing," says Bill Carey, senior vice president of marketing and sales for Boston-based Fidelity Institutional Retirement Services Co. "There are nearly 2 million companies out there with under 100 employees."

As financial services firms have broadened their offerings in order to include small enterprises, many have seen a nice rise in business.

Fidelity brought in 800 clients last year through its plans for firms with 1,000 or fewer employees. Some 400 of those clients were companies with 100 or fewer workersÑtwice the number won in 1996. Columbus, Ohio-based Nationwide Financial Services is adding about 200 plans a month through its small market program. And a program for firms with assets of less than $5 million that was begun last year by The Vanguard Group of Valley Forge, Pa., has already brought in 100 accounts.

Still, winning the small market is not an easy process. Small businesses can be difficult to service efficiently. By definition, their assets are smaller than those of traditional larger clients, which means it takes longer for a provider to earn a profit.

Some, such as Boston-based Putnam Investments, have already exited the market. Others, including Vanguard, are setting limits on what they'll do for small businesses.

"We won't go to sell a small business in person; they need to sign up over the phone," says Shellie Unger, principal of Vanguard's institutional investor group. "Also, we must have at least S25,000 as an average balance from plan participants. Otherwise it isn't profitable for us, and we aren't in this to lose money."

Some small businesses chafe at such restrictions and are turning to local third-party consultants to help them put together their retirement offerings. Blue Ridge, for example, is working with Manhattan-based Geller Group.

Third parties tout service

"We act as their 401(k) coordinator, their pension lawyer and their communications consultant all rolled into one," says Sheldon Geller, managing director. "Mutual fund companies like us because many don't have the sales force to go out and approach all the small businesses out there. And the small businesses like us because we provide services that the funds aren't willing to offer."

Michael Butler, pension sales offcer for Nationwide Financial Services, agrees. "We can't provide all the services they need," he observes. "Also, most small businesses like working with local firms. They want to deal with someone across town who they can get to know personally."

Of course, small businesses themselves pay the bill for the consultants. But the best third-party operators are able to get their clients sufficient savings on fund fees which can run as high as $200 a person for a small business to make it worth their while.

Increasingly, small businesses have little choice but to hook up with a fund one way or another. Employees have become much savvier about retirement options in recent years, and their loyalty to their employers is based in part on the benefits they're offered.

"Small businesses are feeling a lot of pressure to provide retirement fund options," says Mr. Carey of Fidelity, which last year launched a project to offer retirement funds to small businesses through state chambers of commerce. It's hard to compete for workers with the company down the street if the other guy has a better plan."

It was Vanguard's individual clients, many of whom are small business owners, who pushed the company into broadening its outreach, says Ms. Unger. "They had their own money with us, and they wanted to create options for their employees as well. It makes it easier for them to hold on to their workers."