NU Online News Service, Sept. 10, 5:35 p.m. – Life insurers that want to increase 401(k) plan services profits will have to try to attract and keep more contributions from current participants, according to a new report from Lehman Brothers, New York.

“There appears to be no relationship between the number of 401(k) plans operated by a provider and that provider’s profitability,” Lehman analysts Eric Berg and E. Stewart Johnson write in the report. “Rather, the key driver of profitability in 401(k) appears to be assets under management. The larger the pool of total assets under management, the more likely is a higher profit margin.”

Many life insurers and other financial services companies rapidly increased 401(k) plan assets and profits in the 1990s, as soaring stock prices attracted employers and helped pump up plan asset values.

Plan providers fought to appeal to smaller employers and often participated in the market-generated growth by shifting to fee systems based on the amount of assets under management.

But Berg and Johnson, summarizing a recent presentation by Ann Mahrdt, a director at the Spectrem Group, Chicago, say her figures show providers have done a poor job of increasing the percentage of eligible employees who participate in 401(k) plans or persuading the participants to beef up their contributions.

Now, the analysts write, the stock market slump has emphasized the danger of depending too heavily on the performance of the stock market to drive 401(k) profits.

Meanwhile, when participants withdraw plan assets, providers retain only about 20% of the assets, the analysts write.

The challenge for providers will be to find efficient, affordable ways to increase assets under management by building stronger relationships with the individual plan participants, the analysts conclude.