Competition Heats Up For Retirement Accounts

US Banker -- April 2, 2007 -- by Lee Conrad -- Small businesses are considering new 401(k) options to offer employees, causing bankers to see big growth opportunities. This growing market is buttressed by changing demographics and recent legislation that's making it easier for small firms to offer such plans. The 401(k) market for small businesses has been dominated by third-party companies ADP and Paychex, as well as insurance companies and Wachovia, the bank gorilla in this space.

But competition started to heat up last June when Bank of America launched a small-business payroll product, Business 24/7, that industry observers say is a stepping stone to offering a 401(k) tool. The enticement for BofA to do so is compelling. Of the 7.8 million small businesses in the U.S. with 100 employees or fewer, just 17 percent have some sort of retirement plan. What's more, the 401(k) business enjoys high profits; a 25 percent to 35 percent margin is the norm, says Mark Gutrich, president of ePlan Services, which creates online small business 401(k) plans sold through banks.

Business 24/7 is a suite of tools designed to reduce the time that small-business owners spend on administrative tasks and has a payroll function as its centerpiece. Some sort of payroll service is the hook helping banks snag more 401(k) business among small companies, says Gutrich. Small businesses may switch vendors for a number of services, but payroll is often the exception. Once they get a provider that works, they stick with it. Tom Modestino, senior analyst at consulting firm Cerulli, agrees that banks are in a good position to gain a larger share of the small-business 401(k) market since they already deal with them in deposit and loan relationships.

"Bank of America shot a salvo across everyone's bow with the announcement," said Gutrich. BofA declined to make an executive available, but Gutrich said the announcement told the rest of the industry that another major bank had decided that small-business payroll is a valid business.

Moreover, Gutrich says that 8,000 of BofA's 12 million small-business customers have signed up for the payroll service since it was announced-an impressive pace of adoption. That compares to 9,500 small-business customers signed up by Paychecks last year, and 4,500 by ADP, Gutrich says.

Mark Halverson, a partner in the capital-markets practice of Accenture, takes a high view of the trend. The real benefit for banks is when the Baby Boomer generation begins to cash out of 401(k) plans either to roll over the money into another account, or simply to spend it. And if banks are offering 401(k)s, they will reap the benefits. "Whenever money moves, banks can add revenue," he says.

Cost, always a concern for small businesses, should be alleviated by recent legislation. The Pension Protection Act, passed in August 2006, allows companies to establish 401(k) plans that automatically enroll employees, so workers must actively opt out of the plans to discontinue contributions. The law also allows companies to implement a less expensive vesting schedule.

E.J. Cummings, vp of product development at Wachovia, says 401(k)s have become ingrained in the public mindset to the point that even small businesses are feeling pressure to have them in order to attract and retain employees. "When people are interviewing [for a job], the question they ask is usually 'What's the match?' or 'What's the vesting schedule?' Not, 'Do you have a 401k?'" he says.

Another driver behind 401(k) adoption is that many small-business owners start their companies believing the business is their sole retirement plan but soon realize they need a 401(k) plan for themselves

Wachovia, a bank leader in this space, has been offering small-business 401(k) plans for five years. "We have people talking to small business all the time," Cummings said, noting that 35,000 to 50,000 small businesses are expected to establish a 401(k) plan this year. One challenge will always remain, however. Many small firms simply go out of business, says Patricia Hines, an analyst at TowerGroup. "There's a lot of churn there, which makes for a high cost of acquisition," she says.