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Fidelity Sees 401(k) Growth Even Without New Law


Fidelity Investments expects its Advisor 401(k) platform to maintain its strong recent growth pace but says it does not look for an extra boost from recently enacted pension legislation.

The Boston mutual fund giant said that assets in its Advisor 401(k)s grew 21%, to $14.5 billion, in the 12 months through June 30. This growth, coupled with platform enhancements prompted by the Pension Protection Act of 2006 that was signed by President Bush in August, has encouraged analysts to expect enormous if not exponential growth in the Fidelity product.

However, David Liebrock, an executive vice president at Fidelity Investments Institutional Services, said he has more moderate expectations.

I expect well continue to grow at the same rate we are growing today, he said. Could it be more? Yes. But I think we have got to be careful. We are dealing with large numbers here, and we dont want to make assumptions. You have to be realistic.

The legislation, signed into law Aug. 17, encourages companies that are 401(k) program sponsors to automatically enroll employees in their plans unless the employee opts out. The law also reduces liability for plan sponsors that offer investment advice to participants.

Retirement Security Project, a nonfor-profit research organization based in Washington, estimated that the law could mean an additional $10 billion to $15 billion a year in savings in 401(k) accounts.

We are going to see strong growth, and I expect that that will absolutely continue because of these changes, said John Nixon, a partner in the Blank Rome law firm whose Washington practice focuses on retirement plan issues. This is a win-win for employers and for investment firms in terms of generating significant assets under management.

Liebrock conceded that the new law would increase 401(k) participation. A Fidelity survey of 10,800 corporate plans that was released last year said participation in 401(k) plans overall, including both those with automatic enrollment and those without, stood at about 66%. Plans with automatic enrollment have 76% participation.

The new legislation and changes on our platform will mean growth, without a doubt, he said, but we are still going to need to service those assets, and there is a cost associated with that. I would tell you that this will mean significant growth for [financial] advisers and for companies, like ours, that service advisers.

So, why is Fidelity not more optimistic?

Liebrock said the Advisor programs strong growth pace in the past 18 months was built on significant changes in the platform, including the addition of third-party funds and increases in the sales forces size. Fidelity will have to work to maintain this momentum, he said.

Fidelity recently announced further platform enhancements in response to the new law, including an automatic enrollment service, annual automatic increases in the amounts employees defer into their 401(k) accounts. and educational tools for employers, employees and advisers.

Though some analysts said the new law and changes by companies like Fidelity are effectively creating defined contribution plans with automatic enrollment features that look and feel like defined benefit plans, Nixon disagreed.

Liebrock said it is crucial for employers to get employees to save for retirement. If people dont save enough, he said, they wont retire, and then employers have to worry about issues surrounding healthcare for older employees and compensation costs. Plan sponsors want people to save, but they dont have the resources internally to get people to save. They need to work with advisers to prompt those savings.

The new law is a great opportunity for advisers, Liebrock said. It lets advisers supply advice either through computer-generated models or through one-on-one meetings as long as the pricing is level within each mode for all clients.

Advisers were sitting there wondering if and how they could give advice to 401(k) participants, he said. The new law allows them to give advice and to be compensated for it. This is a good thing for participants and plan sponsors. The 401(k) plan has become the main source for saving for retirement in the U.S. because the number of defined benefit plans has decreased. This is, for most, the one and only way to save for retirement. We need people to recognize that and get in early.

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