Pension Plan Devised For Small Businesses
Edward Fitzsimmons, owner of Yellowbird Motor Line Inc. in New Bedford, Mass., faces a challenge. He wants to offer his 20-plus employees a second pension plan, on top of the firm's profit-sharing plan.
"These guys are mostly in their 30s now, and they will need more than our plan now provides when they retire," Mr. Fitzsimmons says.
He says he needs a turnkey product in which the pension-plan provider does all the work, "because finding the time and money to manage pensions is a big problem," he says.
In April, however, he read that the United States Chamber of Commerce in Washington had struck a deal with Fidelity Investments Inc. of Boston to offer the Chamber's 215,000 member businesses just such a turnkey package, starting in July. Products offered will include 401(k), Keogh, and SEP (simplified employee pensions, with versions for the self-employed and also employees of very small companies).
Typically, Chamber member companies have less than 100 employees.
Fitzsimmons called the Chamber right away, since his firm is a member, and he is now on the waiting list to enroll in Fidelity's program. Six of his employees have already expressed interest in this type of pretax, payroll-deduction plan.
"The Internal Revenue Service has all these complicated pension regulations, and they are all over you. I've been waiting to go outside for this," Fitzsimmons says.
There could easily be a million small-business employers across the United States looking for such a plan, experts say.
Few providers, however, have a record of offering pensions to small firms, largely because it has not been profitable. In addition to Fidelity, providers serving small firms include Principal Financial Group of Des Moines, Iowa, Kemper Corp. of Long Grove, Ill., Aetna Life Insurance Co. of Hartford, and American Funds Distributors Inc. of Los Angeles.
"I now expect other suppliers to jump into this small-business market" in a bigger way, says Larry Kraus, senior vice president of the Chamber of Commerce. "The Fidelity contract is a trendsetter, but there are several million firms out there needing help."
Mr. Kraus says government figures show there are between 5 million and 6 million small businesses in the US. Some 80 percent of them do not offer retirement plans.
"Workers, however, are pushing these employers to offer retirement plans," says Raymond Marcinowski, a Fidelity vice president who heads the company's "emerging corporate market" division. Founded in 1991, the unit provides pension plans to small to mid-size businesses. Costs are held down because all services are under one roof - including investment management, recordkeeping, employee-education, and handling of account-inquiry telephone calls.
This helps Fidelity offer an unusual pricing plan. Many providers charge a percentage of all assets managed, so that as the assets grow, the cost goes up. Fidelity charges a flat fee for its services, "so you know exactly" what the future holds for fees, Mr. Marcinowski claims.
The pension industry in the United States, measured by assets, is now growing at a healthy rate of 15 percent a year. Fidelity's emerging corporate market division topped that with 62 percent growth last year. The year before that, assets grew 140 percent; the year before that, 180 percent. The division now has $11.5 billion in assets under management and serves over 4,300 companies and 410,391 employees. Fidelity managed such rapid growth, Marcinowski says, by utilizing the firm's depth of technology and infrastructure.
Fidelity started its pension-plan business years ago by providing these services to major companies. But currently the fastest growth is projected to be in small and medium-size firms.
The new contract with the Chamber, Marcinowski says, was eventually possible because his division "leveraged down" its systems to enable it to serve almost any really small business.
Half of Fidelity's small-business plans are "takeovers" - firms that started with another provider but want a change. "After a business has had some experience with individual pension plans, and they decide to shop again for a provider, they are price- and service-[conscious] buyers," Marcinowski says.
Competition appears likely to heat up. Thomas Foster, vice president of retirement services for Aetna, says the insurance firm has just restructured its pension business to better serve small businesses and also has a campaign to provide individuals with a total planning package for secure retirement.