JennisonDryden -- Prudential's mutual fund arm -- is making a push into the 401(k) investment-only business. And it is not alone. Last week the fund unit hired Goldman Sach's Michael Rosenberg
to head its expansion into the defined contribution space. His hiring follows close on the heels of moves by similar fund firms, including JP Morgan Chase, Mellon Financial, Blackrock, Barclays and a seeming host of other fund firms.
Why are so many fund giants making the push into the investment-only side of the 401(k) business (a space that retirement industry insiders call the "I-O" niche)? And, can they succeed? The why is an easy question to answer, the success in the second question is more challenging puzzle.
The fund giants are making their pushes now for a number of reasons: the pension world has entered what appears to be a death spiral, regulators scrutiny of revenue sharing is opening up platforms more than ever before (some platforms that had required plan sponsors to choose funds that would place half of their plan assets in proprietary funds have sliced that requirement by half, or more), and, finally, the passage of the Pension Protection Act has created an opening for asset allocation funds.
At JennisonDryden, new hire Rosenberg takes the title of senior vice president heading the fund I-O push and reporting to John Drahzal
, director of distribution at the fund firm. His wholesaling staff will include regional vice president Anthony Fiore
. For much of the past decade Rosenberg headed Goldman's retirement business. He oversaw the white shoe banking firm's own push into the retirement market through an alliance with recordkeeper ADP Retirement. Earlier in his career, he honed his skills during 11 years developing and marketing retirement plan products at ABN AMRO, a business that was eventually scooped up by Principal Financial.
Rosenberg is not the only high ranking DC industry insider to make the jump to a fund firm recently. Last January JPMorgan Funds brought David Musto
, formerly head of Pru Retirement's
small plan business, to replace David Skinner as head of its I-O business. Musto reports directly to JPMorgan Funds CEO George Gatch
. Musto's team includes Glen Dial, a former sales pro from Merrill Lynch's Princeton Retirement Group.
Late last year BlackRock made a high-profile move when it tapped Doug DuMond
, a 401(k) industry veteran and former CEO of Overture Capital Management as head of its DC Strategy. DuMond gained his experience at IXIS, MetLife and Aetna Retirement.
Meanwhile, Mellon Asset Management (now owned by BoNY) started its push in February 2006 by hiring Putnam Investments alum Rob Capone
to head its I-O unit. Mellon had earlier sold its 401(k) recordkeeping business to Affiliated Computer Systems (ACS). Capone has put together a sales team to reach advisors specializing in DC plan sales that includes a number of Fidelity veterans. Another fund giant to make a go at the DC I-O niche is ETF-specialist Barclays Global Investors. BGI tapped Kristi Mitchem
to oversee its push into that business.
While all of the above fund firms have the heft to make a bet on experienced 401(k) veterans to open doors for them, the same gamble could prove costly to the typical fund firm does not have the resources of these giants to easily ante into the game. So, should the typical small fund shop be following in these behemoths footprints? Probably not.
Besides hiring expensive DC industry veterans, what can a fund firm looking for a piece of the DC plan pie do? One strategy is to play up regional ties and presence. Like advisors, many plan sponsors and participants feel more comfortable investing in a fund in which they have access to a portfolio manager. Another way is hit the conference circuit to build relationships with a few key advisors specializing in the retirement industry. Two significant events take place each year. In October the Center for Due Diligence
hosts its annual retirement conference (this year it will be held at the Scottsdale Princess resort) and in March ASPPA
sponsors its annual 401(k) Sales Summit. Both events have recently drawn more than 1,000 attendees.
This networking could door open to niche funds. To compete here, fund firms need to have funds with top notch track records and the means to compensate recordkeepers and intermediaries. In most cases this means offering "R" class shares or offering a fund with a 12b-1 fee. With more than 600 fund families in the market, the competition for this niche is intense and top performance is the price of entry.
In most cases, fund firms taking this route will see that their biggest opening is with third-party administrators (TPAs). However, TPAs are most dominant in the under $25 million market, which means it is tough for a fund firm to build scale though this segment alone.
Scale is not easy to find.
Though the Pension Protection Act does open the door to asset allocation funds as core investment for 401(k) plan participants, the incumbent provider in this hyper-competitive market is not asleep at the switch in most cases and it is a fairly sure bet that it already has this option covered. In many cases, the asset allocation funds (which usually come in target date and target maturity flavors) is a proprietary product that can only be pushed from the lineup by an especially forceful plan sponsor. 401(k) administrators that do not have their own funds -- Hewitt Associates leads this list -- have already formed relationships with fund firms for the spot.
In the end, most fund firms may discover that DC plans will remain a niche of opportunity in which they can occasionally leverage a relationship or chance connection into a profitable, but small, sideline. Meanwhile, if you are at one of those firms you may want to sit back and watch the giants battle over a limited number of opportunities. Oh yes, if you are at one of those giants watch out, the fight is still in its early rounds.
Stay ahead of the news ... Sign up for our email alerts now