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Small Firm 401(k) Business Holds Promise

Why would a mutual fund company want to be bothered offering a 401(k) plan to a company with fewer than 100 employees when a 401(k) account at a single Fortune 500 company can mean tens of millions of dollars of assets under management?

Many employees at small businesses are not interested in saving, and their employers do not want to spend the several thousand dollars it would cost them to offer a 401(k) plan, according to the 1999 Small Employer Retirement Survey. Overall, the survey suggested that it is still difficult for a mutual fund company to penetrate this market.

Six-hundred small business employers with 100 or fewer employees were surveyed in January and February by the Employee Benefit Research Institute, the American Savings Education Council and Mathew Greenwald & Associates, all of Washington, D.C. The results were released last month.

Fifty percent of survey respondents that do not already offer a plan said revenue uncertainty made them hesitant to incur 401(k) plan sponsorship costs. Eighty-two percent said they had annual gross revenue of less than $2 million. Nearly a third of non-sponsors said their workers earned less than $20,000 annually; 23 percent said most of their employees were in their 20s and disinclined to be concerned about retirement; and 17 percent said their workers would prefer higher wages or other benefits to a 401(k) plan.

Finally, 19 percent said high turnover of their workers did not make offering a 401(k) plan worthwhile, and 15 percent said it was very likely they would offer such a plan within the next two years.

But Fidelity Institutional Retirement Services Company of Boston has amassed $30 billion of 401(k) assets from 900,000 participants at 6,000 businesses, said Bill Carey, senior vice president for emerging corporate markets for the Retirement Service Company. These businesses have 1,000 employees or less. Fidelity has had a 25 percent annual growth rate in this area since 1996, said Carey. Furthermore, Fidelity 401(k) plan participants at small businesses have a 75 percent participation rate.

Fidelity began going after the small business market with the formation of its Institutional Retirement Services Company in 1991.

The Retirement Services Company now offers three variously-priced products, specifically targeted to this market. It will introduce a fourth product, e401k - a 401(k) program designed for companies with fewer than 100 employees that will be sold and serviced solely through the Internet - by the end of the summer (MFMN 3/8/99).

"We expect the tremendous growth we have already experienced in the small business 401(k) market to accelerate as we roll out e401k and develop new products," said Carey.

Despite the difficulties, Fidelity is very interested in servicing small businesses' 401(k) plans because it is an enormous market, Carey said.

"There are roughly six million small businesses with less than 100 employees - 50 million people - working in small businesses. The marketplace is huge," Carey said. When compared to the 30 million people now participating in 401(k) plans, a 50 million market opportunity is, indeed, a colossal number, he said.

Not only is the market large but it is expected to continue to grow, Carey said.

"Today, 50 percent of the U.S. workforce works for small companies, and 50 percent of job creation takes place in small companies," he said.

Currently, roughly 85 percent of companies with more than 100 employees offer an employee retirement plan, but only 20 percent of workers in companies with less than 100 employees have retirement plans available to them, he said.

"It translates into a great opportunity for the industry," Carey said.