FIDELITY TOEING THIRD-PARTY LINE: MUSCLING UP TO BEST SCHWAB IN RACE FOR SMALLER 401(K) ADMINISTRATORS

Fidelity Investments, already the world’s largest provider of retirement fund services, is gearing up to challenge rival Charles Schwab & Co.’s lead in the race to court third-party administrators.

Early next year, the Boston-based mutual fund titan will unveil an array of products and services aimed at the so-called TPAs, which help businesses set up and manage their 401(k) plans. Fidelity, which oversees some $223.5 billion in 401(k) assets, is also planning to aggressively pursue this small but influential group through an expanded sales force and an advertising and direct-mail campaign.

Fidelity’s effort will be aimed at small to midsize TPAs, which are loosely defined as those concentrating on businesses with fewer than 1,000 plan participants. Firms at the upper end of the market, such as Lincolnshire, Ill.-based Hewitt Associates, already offer clients many of the same services Fidelity is touting.

Additionally, the company recently has formed a TPA Council to learn how it can better serve the market.

Much is at stake. Of the $810 billion that Americans have invested in 401(k) plans, about $295 billion comes from companies with fewer than 1,000 plan participants. By the year 2002, companies in that category are expected to oversee $654 billion of a $1.8 trillion 401(k) market, according to Fidelity. By catering to small to mid-sized TPAs, Fidelity hopes to gather as much of those assets as it can.

The move to court TPAs represents a dramatic shift in strategy for Fidelity, which has always preferred to deal directly with plan sponsors. It is also a momentous nod to Schwab, which has been aggressively courting TPAs for six years.

Schwab has relationships with more than 450 TPAs and services more than $11.5 billion in 401(k) assets which flowed through TPAs. By comparison, Fidelity does business with only 68 TPAs and holds just $3 billion in TPA-originated 401(k) assets.

focus had been lacking

“I don’t think people have historically looked to us because we haven’t had a consolidated approach to the TPA marketplace,” says Ray Marcinowski, president of Fidelity Investment Advisor Group, which is overseeing the new effort. “But that’s where we are going now.”

It’s not going to be easy. Besides playing catch-up with Schwab, Fidelity is entering the market at a time when TPAs are growing increasingly wary of such alliances. The Chevy Chase, Md.-based Society of Professional Benefit Administrators discourages its 425 TPA members from formalizing relationships with mutual fund companies. If nothing else, such agreements may give the appearance that the interest of plan participants is not being best served, says the trade group’s president, Frederick D. Hunt Jr.

“It’s like safe sex,” says Mr. Hunt. “I tell our members to be very, very careful. These agreements better be purer than Caesar’s wife.”

Fidelity also faces a fair amount of skepticism on the part of the TPAs themselves. Because it gathers assets directly from plan sponsors, many TPAs have come to view Fidelity as one of their biggest competitors. What’s to stop Fidelity — or Schwab, for that matter — from eventually deciding to cut TPAs out of the picture entirely?

“It’s definitely a risk we take,” says Dianna Lehmann, an account manager at Pension Specialist Inc., a TPA firm in Rancho Cordova, Calif., that has formal relationships with several investment firms, including Great West Life and Annuity Insurance Co. “Hopefully, we have established enough of a relationship with our clients to inspire some sense of loyalty.”

The TPA market is also very fragmented. Fidelity estimates there are 3,000 TPAs in the U.S., about 1,000 of which fall within the parameters it has established. In fact, the market is so small that Schwab recently disbanded its TPA sales force.

“There’s just not an endless ocean of TPAs out there,” says Glen Mathison, a spokesman for Schwab. “It’s a pretty small world. We decided it was best to focus our resources on the customers we have and helping those relationships flower.”

Schwab’s focus on existing customers may provide just the toehold Fidelity needs to crack the market. The company has quietly boosted the number of funds available through Retirement FundsNetwork, its platform for distributing its own funds and those of other firms, exclusively through TPAs, to 250 — up from 70 at the beginning of the year.

While Fidelity’s network pales in comparison to the 1,500 funds that Schwab offers, it is intent on adding more funds over the next 12 to 18 months.

In the past year, Fidelity has also formed the TPA Client Services Group, a team of 15 to 20 whose sole focus is to build the TPA business. Fidelity is getting ready to expand that team with more salespeople.

“We want to do this right,” says Mr. Marcinowski. “We thought we’d be premature if we went out there with a big sales push before we had the appropriate product offering.”

Among the new products Fidelity is planning to unveil to TPAs at the beginning of the year is same-day pricing, which allows plan participants to get confirmation on trades in a day, rather than the usual two or three days. It is also getting ready to offer TPAs self-directed brokerage capabilities, which would allow plan participants to buy and sell individual stocks.

professionals like option

“This is an option that shows up more with your professional groups, the doctors and the lawyers,” says Mr. Marcinowski. “Since those tend to be larger plans, they are more attractive to the TPAs.”

Fidelity is also getting ready to launch a TPA referral program that will link registered investment advisers with TPAs. Through the program, RIAs will be paired with TPAs in their geographical regions or with those who specialize in the same types of plans.

Schwab already offers same-day trading and self-directed brokerage and is testing a referral program that would bring RIAs together with TPAs to create customized 401(k) plans.

“I don’t think we are late getting into the game,” Mr. Marcinowski says. “No one has really been a major player in this game. We are right up there with everybody else.”