FIRST UNION, FIDELITY TARGET SMALL BIZ MONEY: FIRMS WITH 25 TO 200 WORKERS A MAJOR MARKET

Fidelity Investments is really thinking small. It has joined with First Union Corp. on a program aimed at making 401(k) plans available to businesses with less than $250,000 to invest.

Called Advisor Retirement Connection, the program targets businesses with 25 to 200 employees. First Union estimates that more than 3.5 million businesses on the East Coast qualify.

Participants will be able to invest in First Union’s Evergreen Funds or Fidelity Advisor Funds.

The agreement is the latest of Fidelity’s efforts to penetrate the market for small 401(k) retirement plans. Traditionally, the mutual-fund giant has focused on mid-sized to large companies, a market that has matured, leaving Fidelity with little choice but to head downstream.

“There’s tremendous room for growth at the low end of the market,” says Karina Istvan, a fund consultant at Cerulli Associates in Boston. “It’s only natural that Fidelity would try to be there.”

Jude Metcafe, a senior vice president of retirement services at Fidelity Investments Institutional Services, says the company is talking to several other big banks about jointly marketing 401(k) programs to small businesses. He declined to name the banks involved.

“We’re trying to leverage Fidelity’s size and market share with the distribution of a big bank like First Union,” he says.

lots of demand, too

At First Union, Martha Hayes, senior vice president and head of small business banking, says, “Our customers really want something like this. A lot of banks say they offer 401(k) products to small businesses, but they have minimum asset requirements of $500,000 or $750,000, which are beyond the reach of many.”

Ms. Hayes says First Union, based in Charlotte, N.C., decided on Fidelity because it can produce individual statements for employees and provide them with 24-hour telephone service, quarterly statements and tax reporting assistance.

“We didn’t feel we could keep up with the record keeping if we did it ourselves,&quot
; Ms. Hayes says.

Fidelity is the nation’s biggest manager of 401(k) retirement funds, with $253.2 billion in such assets.

But managing the 401(k) programs of small businesses isn’t easy, even for a Fidelity. Attending to small plans can be costly, time consuming and far less profitable than overseeing big ones.

Putnam backed out

Putnam Investments, for example, quit handling records for companies with fewer than 100 employees two years ago. “We decided to concentrate in the area where we could offer the best service most efficiently,” says Matt Keenan, a spokesman for the Boston-based group.

Fidelity is also taking a risk that the banks will take control of the retirement assets of small businesses once they grow to where it becomes cost effective.

“We can’t stop people from making those kinds of decisions,” says Fidelity’s Mr. Metcafe, the retirement chief. “But I would hope the plan sponsors would be happy enough that they won’t want to switch.”

Cerulli estimates that by the century’s end, 97% of all U.S. companies with more than 5,000 employees will have 401(k) plans in place.

83% lack coverage

By comparison, only about 40% of companies with between 100 and 500 employees will offer such programs. Only 17% of companies with 50 employees or less will have 401(k) plans, according to Cerulli.

Another effort Fidelity is making to court the retirement market is also about to begin: providing financial education to employees of client companies.

In the next few months, Fidelity will unveil an interactive Internet service for 401(k) participants.

The service, called Fidelity Portfolio Planner, combines information on retirement planning, asset allocation and specific investments for plan participants.

Using data from participants about their financial situation, investment horizon and risk tolerance, the program will recommend portfolios customized to Fidelity and non-Fidelity funds and other investment options that are available in the company’s plan.