Monday's Wall Street Journal promises that the pension reform bill will provide a "windfall for fund firms." However, that windfall will likely prove an inch wide and a mile deep. Just a handful of the 650 or so fund families are in a position to exploit the new law to add assets. Among the few are the three fund firms mentioned in the article -- Fidelity, Vanguard and T. Rowe Price. Each of those firms will most assuredly benefit from an increase in 401(k) deferrals and participation. Few other fund firms will see gains, though.

The article's thesis is that the automatic enrollment provision contained in the bill will add 5.5 million more participants to the 401(k) system over the next five years than there would have been otherwise (the numbers are Vanguard's estimate). The article also suggests that advice provisions in the bill will better allocate participant accounts, moving them out of cash funds and into higher margin products.

The issue not discussed in the article is that the bill should also tighten the control of the plan recordkeeper. For firms such as Fidelity, Vanguard and T. Rowe Price, the added control should see them shift more plan assets into propriatary products and away from external managers. For fund firms that lack recordkeeping capabilities, the new law could mean a squeeze out.

One way they will be able to do this is through the use of asset allocation funds tied to managed account models. Asset allocation funds "break the brand" of core funds offered in 401(k) plans and instead focus participants on a target maturity date and level of risk. In most cases, asset allocation funds in bundled 401(k) plans invest in proprietary asset management products provided by the plan administrator.

The move to proprietary asset allocation funds serves to undue a trend to open investment architecture that had lasted more than a decade in the 401(k) industry. During that time, many fund firms abandoned their recordkeeping capabilities as too costly to support and instead focused on placing their funds into plans.

The passive participants driven into 401(k) plans by auto-enrollment will bypass the core funds and end up in the asset allocation funds unless their interest in the plan is sparked.

However, outside fund firms may have a tough time sparking interest in their funds. In most cases, the plan sponsor and recordkeeper control access to the participant. That means that fund firms are unable to contact participants directly and may see their message diluted by the intermediaries.

What can fund firms do to build their presence in the 401(k) market? The one easy, albeit expensive way used in the past -- paying for shelf space -- is less viable in the post-Spitzer era. Another way is to seek out alliances and tighter relations with recordkeepers that are not also in the asset management business. The largest of these include Hewitt Associates and Affiliated Computer Services (ACS), but there are many opportunities with smaller third-party administrators such as Milliman USA and The 401(k) Company.

Bank of America, which sold its own recordkeeping capabities, has been successful at wooing the key advisors and brokers who recommend plans to employers.

None of these paths are easy, but then windfalls rarely are. 

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