What the confidential documents uncovered by Reuters say about Fidelity's future in the 401(k) business

Despite reversals reported by Reuters from confidential debt offering documents, Fidelity Investments is continuing to grow its 401(k) business, according to the company.

The giant of the defined contribution business lost 400 administered plans from its Workplace Investing division between June 30, 2009 and March 31, according to the article by the news service entitled Fidelity has lost 401(k) customers.

Fidelity had 17,500 accounts with that 401(k) division as of June 30, 2009 that dwindled to 17,200 by the end of 2009. The account total dipped again to 17,100 by the end of March, according to the confidential documents cited by Reuters.

Bigger picture

Though Fidelity is not disputing the information revealed by the documents, it is making clear that the information misses the bigger picture.

“The number of defined contribution plans increased from 2009 to 2010,” says Steve Austin, spokesman for the company. “That’s a major area of growth for us. That’s very successful.”

Most of that growth is coming from Fidelity 401(k) Advisor, which jumped from 3,494 administered plans in May of 2009 to 3,848 in May of 2010 or about a 10% jump, he says. Assets in these plans jumped from $18.5 billion to $24.1 billion during that same time period.

The total number of defined-contribution plans Fidelity administers, including those it handles for the public sector, stood at 22,913 as of March 31, up from 22,886 plans at the same point a year before, according to what Fidelity’s spokeswoman Anne Crowley told Reuters.

The Reuters article also mentioned that Fidelity lost mega 401(k) accounts this year like Ford and Apple and that Schwab won the account of the latter company. Schwab declined to comment for this article.

Analysts and other industry observers [who asked to remain anonymous] say that it is difficult to directly connect the accounts Fidelity lost with its actions as a company.

Substantive changes at Fidelity

But they say that Fidelity has certainly undergone substantive changes during the last few years — and that its competition has gotten stiffer.

For instance, they point out that other firms may have either a perceived pricing or transparency edge in some cases. They add that executives like Bob Reynolds – instrumental in building the Fidelity 401(k) franchise – have left Fidelity and that dozens of its lower-level executives with considerable 401(k) expertise have also left over the years – taking their knowledge of the business with them to competitors.

Fidelity could also be experiencing some effect from the several rounds of layoffs that have reduced the staff-to-client ratio, says Sean Cunniff, research director for TowerGroup of Needham, Mass.

“What we’re hearing from the inside of Fidelity is that it’s starting to feel like working at other large financial organizations – where it used to feel like a [special] place – but it’s a stretch to say that has anything to do with whether they gained or lost,” he says.

Indeed, it’s unlikely that Fidelity is losing its edge, says Craig Watanabe, principal with Penniall & Associates, Inc., an RIA in Pasadena, Calif. with approximately $600 million in 401(k) assets under management and $400 million in non-retirement assets. Its largest plan is $65 million but the bulk of its accounts are $5 million to $25 million in size.

“A loss of 400 clients from a total of 17,500 is a 2.3% loss. Without perspective of how other 401(k) providers have fared this data is not meaningful. I don’t have the data but my guess is this decline is not out of line with industry statistics.”

Indeed, Fidelity’s Steve Austin says that his company’s business has been affected by the global economy as much as anything. It has resulted in employee layoffs, business closures and mergers – all of which hurt 401(k) plan participation.

Wishful thinking

Thinking that Fidelity is losing its edge would involve some wishful thinking — but RIAs are also making progress, according to Scott Pritchard, managing director of Capital Directions LLC of Atlanta. Capital Directions has $800 million of assets under management including $200 million of 401(k) assets.

“As much as I’d like to say that Fidelity has lost their edge, I think this is just a reflection of the fact that a small percentage of plan sponsors have begun to recognize the value of working with independent RIAs,” he says. “Obviously, I hope it is a trend that will pick up speed, but I don’t anticipate a sudden rush. I’m afraid that far too many plan sponsors are simply satisfied with “good enough” and aren’t willing to take the time to truly seek what is in participants’ best interest.”

Austin says that Fidelity itself is banking some its 401(k) future on RIAs. He noted the products that Fidelity is bringing to market for RIAs. See:Fidelity brings its 401(k) muscle to RIAs with new product. In a release Fidelity published a Cerulli statistic showing that RIAs manage nearly $1.4 trillion, including more than $230 billion in 401(k) plan assets.

Watanabe agrees that Fidelity is showing signs of responsiveness to an evolving 401(k) market.

Fee-leveling of 12b-1 fees

“The 401k space is changing but Fidelity has responded to some of the changes,” he says. “Earlier this year they announced they would be offering fee-leveling of 12b-1 fees so that fiduciaries can avoid a prohibited transaction. This feature is expected to be available next month. Also, Fidelity has opened up their platform to non-Fidelity target date funds. This was a very recent change in direct response to competitive pressures.”

Fidelity is very aware of the trend toward 401(k) plans being sold through advisors in general, Austin says.

Currently 80% of 401(k) plans are sold by an advisor, up from 53% in 2003, he adds.

See:Why gathering big-time 401(k) assets — and charging regular fees — is well within reach for most experienced RIAs.

Fidelity administered corporate plans totaling $759 billion at the end of March, up from $626 billion at the end of June 2009.