Fidelity is still the king of the US retirement market, at number one among the defined contribution (DC) plans with over $940bn (€651bn) of assets in custody as record keeper at the end of 2010, 12% more than the year before. And there is not a traditional bank among the top five players, according to P&I. Hiwever, Wells Fargo, JPMorgan Chase and Bank of America are changing their strategy.
"The wealth market in the US is around $15trn: one-third is in company sponsored DC plans, one-third in individual retirement accounts such as IRAs and the rest in taxable accounts. We estimate that this market will more than double in the next 10 years, so this is the right time to focus on it," says Michael Falcon, managing director and head of retirement for the US and Canada at JP Morgan Asset Management. "But we have a big commitment to grow in the retirement market," Falcon stresses. JP Morgan Retirement Plan Services manages 688 plans covering almost 2m participants with $120bn assets, and is in eighth place among record keepers in terms of assets.
"It's a very competitive market and big banks have initiated efforts to increase their market share, understanding that DC plans are the primary way for Americans to save," says David Wray, president of the Profit Sharing/401k Council of America, which represents 1,200 companies.
Another reason for this focus is that banks are trying to find new profit sources after the heavy losses they suffered with mortgages and the limits imposed by new regulations.
But they will have to fight hard to conquer new clients among plan sponsors, who "are more interested in fine-tuning their investment menu rather than changing provider, because changing the provider is a very complicated logistical process," says Wray. "Besides, current providers are very good with the quarterly statements, the whole compliance and supporting system. However, our 2010 survey found that 52% of plan sponsors have changed their investment menu because of the higher sensitivity to performances after the financial crisis."
JP Morgan is pursuing this strategy. "Our most important competitive difference is our funds' performances," says Falcon. "We have provided consistent outperformance net of fees: our SmartRetirement funds are all four- and five-star rated by Morningstar and peak-trough-peak through the financial crisis have provided some of the best returns in the industry."
Wells Fargo, the sixth larger provider of DC plans, with $158bn assets under custody at the end of 2010, has a different approach. "To be competitive, offering the right investment choices is important. But fee disclosure is even more vital and we think that our value added is in the information we give to our clients, with education help online, by phone and through our financial advisers," says John Papadopulos, head of retirement at Wells Fargo.
It looks like this strategy is working: in 2010 the bank's retirement business grew more than the industry average and more than the US stock exchange - in the first quarter of 2011 it added $4.6bn. Two new Wells Fargo clients are the home improvement retailer Loewe and the telecom company CenturyLink. "This is a core business for Wells Fargo and after completing the merger with Wachovia we are now totally focused on investing in it and growing," Papadopulos adds.
Greeting-card retailer Hallmark Cards is JP Morgan's most recent client: it switched its plan to the bank last year "to reduce costs and improve services for employees", says Tresia Franklin, head of benefits and compensation for Hallmark.
In order to provide stronger offerings to plan sponsors, JP Morgan has recently launched R6 shares - without 12(b)-1 or distribution fees - across its most important asset classes for retirement, as well as revamping its commingled structures (a kind of separate account). "Between our 2.3m small business lending relationships, our 32,000 commercial banking relationships and our investment bank, we have access to a lot of customers that already know the first-class manner in which JP Morgan does business," says Falcon. "We are now working to identify synergies that will allow us to bring more of the bank's capabilities to retirees."
Wray confirms that other businesses with corporate clients can give big banks an easy pitch to make the sale presentation for their funds, but he warns: "Plan sponsors are trustees who can decide only on the best interest of the plan members."