Principal - The Understated, Quiet 401(k) Provider
March 1, 2004
It's not every day one encounters a company that's content to be No. 2. But that's exactly the business plan of Principal Retirement & Investor Services. While Principal serves three million investors in 40,000 employer plans, most of those plans are at companies with 1,000 workers or less.
Ever since Principal, a 125-year-old firm, entered the pension and retirement services market 60 years ago, it has concentrated on serving smaller businesses with personalized service, says Larry Zimpleman, president, Principal Retirement, and EVP of Principal Financial Group.
Zimpleman recently spoke with Money Management Executive Editor Lee Barney about how he plans to grow his firm, as well as some of difficult issues facing 401(k)s.
MME: How has becoming a publicly traded company three years ago changed your firm?
Zimpleman: For the quiet firm that we are, being a public company has really raised our visibility. Asset management is just the integral part of our retirement businesses. We have to be good at asset management in order to be good at retirement.
That said, we have continued to focus on our retirement business. We are extremely well-known in the industry as one of the nation's 401(k) leaders, and as a leader in total retirement services, particularly in the small-to-medium-business (SMB) market.
MME: Why pursue the smaller market?
Zimpleman: That's how we define ourselves: Serving employers who have 1,000 employees or under, although we are also finding ourselves in the 1,000-to-2,500-employee market, because of our total retirement solutions capabilities.
This is the market we have pursued for the 60 years that we have been in the retirement market business. We have a very long and deep expertise in that business. We have a local presence in 47 cities around the U.S. We have 100 sales reps. We have 150 service reps. So, we have the national footprint to pursue a very local SMB strategy.
We have also built an impressive array of infrastructure and technology capabilities that gives us a very, very scalable platform so we can use our fully bundled retirement solution without having to add cost. All this works very well in the small/medium business market.
MME: When Principal started in this 60 years ago, at that point, a company with 1,000 employees would have been a giant. As corporate America grew to be larger, did you fall into the next-tier down?
Zimpleman: We definitely want to be in the second tier. I can't emphasize enough that it is a chosen decision on our part. It's not that we couldn't compete.
If you look at the 1,000-or-less market, you'll find that 98% of the businesses in the United States would be classified as small/medium businesses, and there are 5.7 million businesses out of six million that are in this niche. So, we think we have the lion's share of the market.
The other thing is that when you look at the net employment growth and the general year-by-year economics, you see very different trends in the SMB market and the large market. If you take the decade of the 1990's, for instance, the SMB market saw net employment growth in nine of those 10 years. That has not always been the case in the large employer market, which not only is saturated, but tends to go through boom-and-bust cycles.
MME: Is that why Fidelity has been targeting the smaller 401(k) market in the past few years?
Zimpleman: I think that's right. There are no new companies of 5,000 or 10,000 people being formed. Ninety-five percent of those companies already have a 401(k) or defined contribution plan. Anything there involves what we call a transfer or takeover situation.
In the 500-or-less employer market, only about 40% of those employers have any type of defined contribution plan. Overall, that adds up to 11% per annum growth in the large market, and 15% in the SMB market.
MME: What about corporate governance, a hot topic today. Are your clients now making any new requests here, with regards to concerns over the fund scandal and better governance?
Zimpleman: Our clients are experiencing a significant amount of concern and anxiety, as we all pick up the paper every day and read about some new variation of the problems. It continues to be a troublesome and unfortunate series of events for the industry.
They want us, as an organization they rely on, to play a more active role in monitoring and, ultimately, due diligence, around the various investment options and providers they make available.
They expect Principal Financial Group to be a very important partner to them, to make sure that the right monitoring and the right decisions are being done and made, relative to investment choices. This has become a critical part of our sales process. It's become a critical part of our servicing process.