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A Mass (Affluent) Retirement Market

WASHINGTON - Mutual fund companies and their attendant banking channel need to engage the mass affluent, rather than simply chasing the wealthy, if they seriously want to develop their retirement businesses.

Kenneth Lewis, Bank of America's chairman, noted for the first time in the company's 2007 annual report the importance of retirement services to BoA's future. "One of our best opportunities to expand [client] relationships is retirement," Lewis wrote.

But there is competition for these clients, so fund companies must move fast.

The top 10 retirement services providers to the mass affluent control 40% of the market, according to a survey by BAI Research in Chicago and Mercatus Partners, a consulting firm in Boston. Fidelity Investments is the leader with a 12.9% market share. Only two banks, Wachovia Corp. and BoA, are among the top 10, holding on to slots eight and 10 with a 2.1% and 1.9% market share, respectively.

Unwilling to rest on those laurels, Keith Piken BoA retirement solutions managing director, said: "We are behind. But Fidelity still only has a 14% market share in IRAs, so the market is still fragmented. No one has won yet."

The critical takeaway for fund companies is that banks, while not known for the sales acumen of a brokerage outlet, have a distinctive home advantage. Many mass-affluent customers consider their bank their primary financial institution, and trust sometimes decades-old relationships they have formed there.

"If consumers don't already have a brokerage account, their major financial institution relationship is with their bank," said Teresa Epperson, a Mercatus partner.

But while the mass affluent are willing to talk to banks about retirement, few are using them for advice: only 18% of men and 22% of women, according to the survey. Most are still turning to brokers and fund companies for such advice.

Banks have been slow to offer advice for fear customers would deplete their savings and deposit accounts to fund investments. This hasn't happened. In fact, mass-affluent customers who have a retirement-planning relationship with their banks bring in more assets than those who don't.

Thirty-one percent of mass-affluent consumers who have talked to their banks about retirement roll over their 401(k)s to the bank, 36% consolidate their assets there, and 35% consolidate their income sources.

In total, 69% said they had done so because they already had a relationship with their bank. By comparison, of the mass affluent who hadn't talked with a bank about retirement, only 18% had rolled over their 401(k)s, 15% had consolidated their assets, and 16% had consolidated their income with their bank.

Strong Banking Ties

The banks involved in the Mercatus study-BoA, SunTrust, Wachovia, Washington Mutual, and Wells Fargo-are now examining how to serve clients in the accumulation phase to turn them into future advisory clients.

Most mass-affluent consumers are already comfortable monitoring their accounts online, said Bob Hedges, managing partner at Mercatus. Banks need to automate both the accumulation and distribution phases of retirement for the mass affluent, he said.

Fidelity built an automated product delivery system when it launched the aggregation service Retirement Income Advantage accounts in 2004.

These accounts take in all of a client's retirement savings and invest it in a mixture of Fidelity products. The client receives a monthly "paycheck" from Fidelity, and the account features bank-like services such as automated bill-pay, a checkbook and a debit card.

Of the five big banks that took part in Mercatus' study, BoA seems closest to building such a platform, with a retirement-paycheck service in product development.

And just like Fidelity, all five banks have been tweaking their websites to focus on retirement over investments.

True to the old-school adviser-client model, all five banks say mass-affluent clients are welcome to speak to a platform rep or an adviser about retirement savings, but at lower asset levels, these clients are encouraged to use call centers and the Internet, where their usage can be tracked.

Piken called the first four months of this year the "first drive" of BoA's retirement marketing campaign. Retirement messaging will be placed at 5,700 banking centers nationwide. Branches in core markets, including Boston, Charlotte, N.C., Chicago, Dallas, Los Angeles, Miami, New York and San Francisco that are large enough to accommodate additional foot traffic are being wrapped in huge "uber-posters" pushing IRAs.

"We have a 1.3% share of the market now, but the goal over the next few years is to be in the top five, which would mean hundreds of billions in additional assets," Piken said.

Wachovia is working on several ad campaigns focused on retirement planning, specifically targeting women. Wells Fargo is working on its retirement savings index program, and SunTrust is rolling out a campaign promoting free 20-minute planning consultations at its call centers, manned by Series 7 and 63 licensees.

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