One on One: "Advisers can make a lot of money selling 401(k)s"

Douglas Manchester is the Johnny Appleseed of Internet 401(k) plans. First he started Fidelity Investments’ e401(k) program in 1999. But at Fidelity, he says, he felt constrained – he was trying to build a New Economy company onto a legacy-style computing infrastructure.

He left the Boston mutual fund giant last year to found a startup called Emplanet Inc. in Westborough, Mass., to capitalize on what he sees as a historic trend — employees leaving large corporations in droves to join smaller ones.

While the migration is good news for employees and small companies, it also opens doors for advisers to manage the 401(k) assets of migrating employees.

Small companies can offer stock options that one day could be worth millions of dollars, but most people want and expect to be able to put money away with a staple 401(k) plan.

Currently, many companies with fewer than 100 employees find it too costly and complicated to offer retirement plans.

But Mr. Manchester believes he can change that using the Internet along with financial advisers and brokers, who get to sell a simple-to-set-up, inexpensive product, but are still motivated by fat commissions.

Meanwhile, Fidelity’s e401(k) is thriving with 1,200 accounts, but its services in managing small businesses’ 401(k) plans don’t come cheap. Fidelity charges $750 in setup costs, $1,750 annually and $20 per plan participant.

However, by using the Internet, Mr. Manchester says, his processes are 40% to 60% cheaper.

Emplanet customizes each fee and makes most of its money on transfer fees, which are paid by the mutual funds. For instance, a 401(k) plan with 30 participants and $300,000 in assets would have no startup or annual costs and would charge $20 per participant.

Mr. Manchester, 43, is not doing it alone. Oak Hill Venture Partners in Menlo Park, Calif., has provided the initial funding, and he has enticed other former Fidelity executives to join him, including Emplanet’s president, Mike Perez.

During his tenure at Fidelity, Mr. Manchester launched four new businesses: Fidelity Investment Advisor Group, Fidelity Technology Group, Fidelity Employee Services and Fidelity Managed Portfolio.

He also launched products and services, including Freedom Funds, Plan Expense Reimbursement and FundsNetSM, as well as the online 401(k) program.

“Doug has the ability to combine intuitive marketing skills with an in-depth knowledge of the industry,” says Joseph R. McCabe, partner with the Boston office of Heidrick & Struggles, an executive recruitment firm. “He’s a can-do guy, so bright, high-energy individuals want to work with him.”

Q You founded Fidelity’s 401(k) Internet program. Does Emplanet go beyond that?

A People have used the Internet as a new channel to service a participant. What they didn’t really look at is how to use the technology, including Internet-based technology, to completely rebuild the processes everybody goes through. We achieve a different end for everybody rather than substitute for a piece of paper.

Q Does that process help independent advisers get 401(k) products into the hands of their clients?

A Advisers have a lot of smaller clients that don’t have a 401(k) today because they couldn’t afford it, they didn’t want to go through the work, or it was too expensive, or they couldn’t find someone to offer it.

We expanded the target market of companies with 401(k) programs, and advisers know a lot of these companies.

The second benefit is that we distribute our product only through brokers and advisers. We do not have a direct-sales strategy.

An adviser can do all the administrative work of selling a 401(k) online – and in much less time and effort than they did before – and get paid a lot of money for doing it.

Q How many small businesses fall below the threshold of using 401(k) programs conventionally?

A There are literally millions of small businesses, and the ratio is – for companies with more than 10 employees and less than 100 – that only about 20% of them have a 401(k) today, according to Cerulli Associates. On the other extreme, you have the Fortune 100 companies – it’s like 98%.

Q Why should advisers seek to attract the business of small-business owners?

A Advisers can make a lot of money selling 401(k)s.

Q Are small-business 401(k)s a vast, untapped market or are there good reasons why it has been neglected in the past?

A The buyers didn’t want to buy [401(k)s] because they were expensive – and a lot of administrative work. The sellers didn’t want to sell them because there was so much work on our side, we couldn’t make any money on them. You had two unmotivated partners.

We can make money on small plans, and now we’re trying to team up with advisers who we pay extremely well. Brokers get 12(b)1 plus the finder’s fees.

If they don’t have a broker registration, we put in place a similar compensation.

The other spectrum advisers need to think about is that they need to help their clients help people manage their wealth, and for most people, a 401(k) is an important part of their wealth.

We’re very, very adviser friendly in terms of helping an adviser manage those assets. They can go on our website and look at the balances and look at the trades and do all the things they traditionally do with their brokerage assets.

Q Who’s your biggest competitor in marketing 401(k)s in this manner?

A I would say a company like GoldK [Investment Services in Rochester, N.Y.] is our biggest competitor.

Q I understand you have a private-label strategy for your products. Is that the case?

A The thoughts are that we can enlist the big brokerage firms with their thousands of brokers to get us premier shelf space, but we’re also going to those brokers independent of the home office.

When we go to the big brokers, we say, “Hey, your brand is worth a lot.” There’s no reason you have to see “Emplanet” on the 401(k) platform.

Q What customers are you serving with your products?

A We have a six-employee Internet startup that’s our smallest. They’ve never had a 401(k) before.

We also have a 2,000-person conversion plan with $25 million in assets [provided by] a traditional retail organization.

Q Only 20% of small businesses have 401(k) plans. Do you expect that ratio to change radically over the next five years because of firms like yours?

A We do. I think you could get it north of 50%. There’s a lot more pressure on small companies to put a 401(k) in place.

All job creation in the United States is being done in small companies. Large companies across industries are not adding employees.

All new employees are being added to small companies, and most of those employees are coming from large companies. And those employees, if you ask them, say their most valuable benefit is their 401(k).

To continue to attract these employees, they’re going to have to offer 401(k)s. So there’s been a lot more interest from small companies in putting a program in place.

Two-thirds of the people with a 401(k) say it’s their largest asset outside their primary residence. If you’re a money manager – think about it – where’s the money? It’s in the 401(k).

Advisers have never been able to charge their 1% on 401(k) assets. They could never see the balances because the [asset-aggregation] linkages never existed in the 401(k) business. We’re putting that technology in place for advisers for the first time.

SNAP SHOT

Douglas Manchester, 43, CEO and founder of Emplanet Inc. in Westborough, Mass.

Career: 2000, founded Emplanet Inc. with funding from Oak Hill Venture Partners in Menlo Park, Calif.; 1990-2000, held several positions at Fidelity Investments; 1985-90, worked at McKinsey & Co. in New York, where he started his career as a consultant

Education: 1980, bachelor of science from the University of Vermont; 1985, master’s in business administration from the Tuck School of Management at Dartmouth College; graduated as an Edward Tuck Scholar