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Friday, October 18, 2002

The Morphing of the Fund Industry

by: Sean Hanna, Editor in Chief

Fund firms that have not built distribution in through retirement accounts are becoming increasingly marginalized. The latest evidence of the trend was provided by Strategic Insight this week. The Manhattan-based researcher and consultant has finished crunching its fund flows numbers for 2001.

At $80 billion flows into retirement accounts, including 401(k) plans, IRAs, variable annuities and other individually-directed plans accounted for more than the entire flows into the industry in 2001, estimates Strategic Insight.

Avi Nachmany, director of research at the firm, says the numbers underscore the importance of qualified buying in the industry today. "Retirement investments have contributed about $150 billion annually to stock, bond and money market mutual funds even during the past two years of collapsing stock prices," he noted.

That trend has presented problems for many investor-focused fund firms that find the qualified plan market to be a cipher. Those firms have also seen sales through traditional brokerage and advisor channels slow as new products such as wrap accounts have caught on. Both the qualified plan and wrap account products require unique skills, knowledge and connections that many fund firms are finding they lack.

The growth of that channel is creating squeezes at many fund firms though. On the large end of the market, a few key players -- including Fidelity, CitiStreet, Hewitt Associates, Merrill Lynch and Mellon HR Solutions -- have tied up distribution to individuals and are taking advantage of their role as gatekeepers by charging revenue shares or holding down asset management charges in the programs. Firms without strong consultant relationships with gatekeepers such as Callan Associates and Watson Wyatt are also finding rough sledding in that market.

On the smaller, more retail side of the qualified plan industry, many firms are becoming squeezed by distribution costs. A number of fund firms, including American Funds, OppenheimerFunds, MFS, Van Kampen and AIM are among the fund firms trying to reign in those costs by debuting "R" shares that cut payouts to advisors. Other firm's such as Charles Schwab have also sliced payouts to partners handling the administration of plans.

So, who is pulling money into qualified plans? The top four are all names that one would expect. The top DC sellers in 2001 were:

  • Fidelity with an estimated $16 billion in DC net flows
  • American Funds with $8.5 billion
  • Vanguard with $7 billion
  • PIMCO with $4 billion

    Altogether the $35 billion those firms netted accounted for more than three-quarters of the $47 billion of flows into defined contribution plans.  

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