Exclusive: Fidelity has lost 401(k) customers
By Ross Kerber and Aaron Pressman
July 1 2010

BOSTON (Reuters) - Fidelity Investments has lost hundreds of corporate customers in its defined-contribution retirement plan business over the past year, a challenge for the giant mutual fund company in a critical segment of the industry.

Fidelity's Workplace Investing division provided services to about 17,100 corporate defined-contribution plans such as 401(k)s as of March 31, down from 17,200 at the end of 2009 and 17,500 at June 30, 2009, according to confidential debt offering documents obtained by Reuters.

Boston-based Fidelity has ridden the rapid growth of the 401(k) retirement savings plan market since the 1980s but now faces growing competition from rivals also looking for a share of the trillions of dollars up for grabs in retirement savings.

Earlier this year, Fidelity lost Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz) and Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) to competitors Charles Schwab Corp. (SCHW.N: Quote, Profile, Research, Stock Buzz) and Affiliated Computer Services, now a unit of Xerox Corp (XRX.N: Quote, Profile, Research, Stock Buzz). Fidelity added General Electric Co(GE.N: Quote, Profile, Research, Stock Buzz) as a client around the same time.

A Fidelity spokeswoman, Anne Crowley, said the company's retirement business is doing well overall. The total number of defined-contribution plans it administers, including those it runs for public-sector clients, was stable at 22,913 as of March 31, up from 22,886 plans at the same point a year earlier, despite stress on the business due to layoffs and the financial crisis, she added.

"In that economic environment, our total DC (defined-contribution) business has performed quite well and remains very strong and an industry leader by a considerable amount," she said.


Consultants backed her up on some points. Despite the recent losses, Fidelity remains by far the largest service provider to workplace retirement plans, whether measured by the number of plans or dollars in the plans, said John Meunier, principal at Cogent Research in Boston.

Fidelity oversees almost one-quarter of all 401(k) plan assets, according to a recent Cogent survey. Fidelity administered corporate plans totaling $759 billion at the end of March, up from $626 billion at the end of June 2009. Much of the increase was likely tied to market gains; the S&P 500 gained 27 percent from June 30, 2009 to March 31, 2010, for instance.

Fidelity's greatest strength is its well-known brand name. "The main reason driving clients to them is their reputation and brand," Meunier said. "They don't score as well on costs and fees."

Still, another retirement-plan consultant, Tom Kmak of Fiduciary Benchmarks, said Fidelity seems able to capture large plan contracts such as GE earlier this year. The decrease of 400 companies may not be so significant given the number of companies that likely went out of business during the period, he added.

Retirement plans have been a key source of assets feeding Fidelity's $1.5 trillion money management business.

Speculation that Fidelity's parent company, FMR LLC, eventually might go public has increased along with the age of its chairman and chief executive, Edward "Ned" Johnson, who turned 80 last month. But the company said in a confidential debt prospectus that it currently has no such plans.

"FMR is not and does not intend to become a public reporting company," Fidelity said in its most recent prospectus, dated June 30.

The document also gives an updated financial picture of Fidelity, which typically releases only a tiny amount of information about its results once a year.

First-quarter net income was $430 million, compared with a loss of $115 million for the same period of 2009. Revenue grew on rising markets, and further job cuts controlled its expenses. <Graphic link.reuters.com/qat35m>

Including nonfinancial businesses it wholly or partially owns, the company had 51,600 employees as of March 31, down from 52,500 at the end of 2009. The job cuts lowered costs and in turn helped sustain profits. They also helped Fidelity raise advertising spending such as on its "Turn Here" brand campaign. Advertising and selling costs together rose to $73 million in the first quarter, up from $59 million in the first quarter of 2009.

Fidelity's document also disclosed that it is at loggerheads with the U.S. Internal Revenue Service after the IRS finished an exam of the company's "C Corporation" income tax returns for 2006 and 2007.

"The company and the IRS are not in agreement with regard to the timing and amount of tax deductions related to certain compensation payments and interest paid on junior subordinated debentures," the filing states, referring to notes held mainly by current and former employees.

The filing said Fidelity has until later this month to respond to an IRS report. Crowley, the Fidelity spokeswoman, said "in the normal course of running a large business, it is routine to have audits by the IRS, and common to have ongoing discussion about matters raised during that process." An IRS spokesman declined to comment.

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