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Study: Online 401(k)s Not A Big Factor In The Small Business Market

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Producers selling 401(k) plans to the small business market may have little to fear from Web-based competitors, a new study from Celent Communications suggests.

The Boston research firm found low adoption rates of so-called e401(k) plans, which offer small businesses automated administration, recordkeeping, payroll deductions and even computerized advice.

It is in the last area that e401(k) vendors appear to have stumbled, according to Celent.

“Providers are reconfiguring their business after online advice failed to attract many users,” Celent states in its report, “401(k) Technology Update.”

The sticking point appears to be that businesses and their employees prefer to talk to live advisors about their investment goals and choices.

About 20% of 401(k) participants prefer to manage their investment strategy on their own, says Celent senior analyst Pamela Brewster.

“For these do-it-yourselfers, online advice is fine,” she says.

The vast majority of participants, however, do not feel well served by an automated advisory system. This kind of system provides online recommendations of an investment strategy based on the age, financial goals and other criteria the investor punches in from a keyboard.

“I think automation can give the investor a quick and dirty sense of shortfalls or excesses they may have in their retirement plan, but obviously it cant really do the job of helping the individual set goals and priorities,” Brewster says.

That, she notes, requires the participant to have a relationship with an advisor.

“There is a lot of opportunity for producers to sell plans,” Brewster says.

Another problem for e401(k) providers is that small business plans dont have a lot of assets.

Businesses with 250 to 999 employees have an average of less than $15 million in total 401(k) assets to manage, according to Celent (see chart).

The economy also has inhibited adoption of 401(k) plans, in general, Brewster believes.

“With higher unemployment than in previous years, a lot of small businesses feel less of a need to adopt improved benefits like 401(k)s,” she says.

Vendors of automated plans, such as GoldK and ExpertPlan, charge a flat annual fee ranging from $1,000 to $2,500 to employers using their systems, plus modest subadvisor fees for each mutual fund transaction.

This meant these companies need to sign up significant numbers of employers to make a profit.

“The numbers did not materialize,” Celent says.

As a result, one vendor, Emplanet, went out of business last year, while Nippon Life Insurance Company of Japan, American Skandia, KeyCorp and SunTrust got out of the business. Other vendors began offering their platform to third-party administrators rather than directly to employers, the research firm reports.

Fidelity, Principal, ExpertPlan and Fast401k remain in the forefront of the e401(k) business, says Brewster.

She notes that only 2 years ago, she estimated that 40% of small businesses eventually would embrace e401(k)s, placing up to $1 trillion in assets in the accounts.

So far, however, e401(k) plans have attracted only around $300 billion in assets.

“A lot of small business owners are relationship-driven and want someone to come to if they or their employees have questions or issues,” Brewster says. “So now you see e401(k)s teaming up with others, such as the TPA marketplace, to reach small businesses.”

Vendors also are looking to scale to succeed in the market. Wachovia Corp. for instance, last year bought PFPC Inc., a unit of PNC Financial Services Group Inc.

The unit gives Wachovia new technology that it can apply to recordkeeping and third-party assistance for clients of its retirement services, a company spokeswoman says. Wachovia has more than 4,100 retirement plans with 1.3 million plan participants and retirees.

PFPC also gives Wachovia the ability to leverage its strong broker force to sell more 401(k) plans to small businesses, Brewster notes.

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.