Roll Players

Three small tech firms are carving a niche out of handling 401(k) rollovers. Just wait until the boomers retire.

By Jinny St. Goar, Institutional Investor Magazine, Americas Edition

Last year retirees and job changers shifted nearly $200 billion out of their 401(k)s and into rollover IRAs. As more baby boomers retire over the coming decade, the volume of those exiting assets will explode. Between 2001 and 2046, $20 trillion will move out of defined contribution plans, estimates Morgan Stanley equity analyst Christopher Meyer.

Enticed by this market, several small technology firms are aggressively selling a service: handling the nuts-and-bolts of moving money out of defined contribution plans and into individual IRA accounts.

Plan providers now have a choice: They can build their own rollover system -- the technology to move assets from 401(k)s to individual IRAs -- or they can buy the requisite service from an outside supplier. The cost for developing an in-house rollover system for a provider with less than 500,000 participants: about $1 million.

Three vendors have staked claims to this specialized market: Chattanooga, Tennessee-based ProNvest, founded in 2000; Charlotte, North Carolina-based RolloverSystems, founded in 2003; and Princeton, New Jersey-based Wealth Management Systems, founded in 2000.

All have automated the paperwork for rollovers, putting on the Web the information investors need to make investment choices.

The technology companies collect their fees -- $150 to $250 per transaction and an initial charge of about $1,000 for a provider to connect to the system -- from the IRA or annuity providers that are selected by plan participants.

Early last year the business prospects for rollover service companies got a boost. The Internal Revenue Service issued rules requiring that all plan sponsors arrange to roll over 401(k)s of departing employees whose accounts totaled between $1,000 and $5,000, into IRAs. Previously, these small accounts had either been cashed out or left in existing 401(k)s.

The accounts are both an administrative headache and a business opportunity for plan providers. Forced to handle the chore of rolling over the diminutive accounts, they're eager to find an efficient way to get the task done. Yet as modest as the accounts are, the rewards for rollover artists are not to be dismissed.

Ronald Bush, a consultant with Stamford, Connecticut-based Brightwork Partners, estimates that 3.2 million job changers in 2004 had 401(k)s balances of $1,000 to $5,000, for an aggregate $8 billion in total assets -- "not big bucks," he says, "but not trivial either."

What's more, the potential is open-ended: If a provider can establish relationships early on with small 401(k) account holders, it has a good shot at holding on to those clients through their working lives and even into retirement, when more money and fatter fees come into play.

Fidelity Investments, the largest 401(k) provider, with $425 billion in defined contribution assets under management and administration, has the critical mass to justify an investment in its own rollover apparatus. Last spring it launched AR -- automatic rollover -- but won't disclose what it has invested in the new technology or what volume of rollovers it's processing.

TIAA-CREF, with $350 billion in assets, opted to hire RolloverSystems this past September to handle rollovers for its 3.2 million plan participants. When the vendor did an initial mailing to a small group of TIAA-CREF participants who were about to retire, 44 percent inquired about a rollover, says RolloverSystems CEO Reginald Bowser.

For RolloverSystems, the potential in its contract is enormous: TIAA-CREF reports that each year 400,000 of its plan participants seek a Rollover IRA, either because they're retiring or because they're switching jobs.

RolloverSystems' board is chaired by Robert Johnson, the former CEO of Black Entertainment Television who owns the Bobcats, the National Basketball Association team in Charlotte, North Carolina. Johnson gives three reasons for his large but unspecified investment in the privately held RolloverSystems: It's an innovative business in an emerging marketplace; he supports "passionate entrepreneurs"; and he delights in backing a business in his hometown.

Through RolloverSystems, firms like TIAA-CREF can offer participants a menu of 15 IRA providers, including American Century Investment Management, Fidelity, New York Life Insurance Co. and Principal Global Investors. Participants can compare IRA providers' offerings electronically, evaluating their fees and investment products, the availability of their financial advice and the user-friendliness of their Web sites.

RolloverSystems does, however, forward paperwork to the IRA provider to verify signatures. Only about 8 percent of financial institutions accept electronic signatures, notes CEO Bowser, and this complicates the job of rollover companies like his.

An asset manager that joins RolloverSystems' roster of IRA providers -- there's no cost involved -- gains a showcase on which to display its IRA products to the employers that use the tech company's services. The plan provider can pick and choose among the 15, but once that choice is made, the plan sponsor must offer whatever choices the provider serves up.

When a participant chooses a financial institution on the roster for his or her IRA, RolloverSystems collects a fee. If a provider chooses not to sign up with RolloverSystems, it can still use the firm to handle the mechanics of rollovers, saving the expenses associated with that cumbersome process.

ProNvest, the smallest of the three rollover automaters, started out in 2000 as an automated source of advice to 401(k) investors and added the rollover capability in 2002. At this point, it has contracted for services with 30 third-party administrators with a total of about $22 billion in assets.

Wealth Management Systems gets around the signature, and hence the paperwork, problem by stipulating that plan participants can access its "Rollover Solutions Network" only through their plan sponsor's password-protected Web site. "By the time plan participants find their way to us, they have already made it past the identity checks," explains WMS founder and CEO Jude Metcalfe, who for six years worked on qualified retirement plan services for Fidelity.

WMS focuses on third-party administrators -- the defined contribution plan providers that offer only recordkeeping services and therefore cannot receive rollover assets. Their market share of all 401(k) plans has grown from 15 percent in 1995 to 20 percent in 2005, according to Boston-based consulting firm Cerulli Associates. The financial services providers whose products are available through WMS include American Century, Fidelity, Merrill Lynch and T. Rowe Price Group.

James McCarthy, director of retail retirement marketing at Merrill Lynch, reports that the firm's retention rate on 401(k) assets when plan participants have access to WMS -- that is, the proportion that remains in Merrill products after participants retire or resign -- moved from the "low teens to the mid-20s, just about doubling in the course of one year."

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