401 (k) Technology Update - Navigating Through the Storm

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12 January 2004
Craig Weber

Abstract

Boston, MA, USA January 12, 2004

401(k) Technology UpdateNavigating Through the Storm

Volatile markets, fee pressures, corporate scandals and fierce competition have tested the mettle of 401(k) plan providers during the past two years. More than ever, technology has become a vital factor in the race to service 401(k) plans and maintain profit margins.

In a new 34-page report, 401(k) Technology UpdateNavigating Through the Storm,

Celent Communications examines the changes affecting the 401(k) marketplace and the ways providers are responding by means of technology enhancements and innovations as well as altering their business strategies. In addition, it provides a detailed analysis of five 401(k) providers who Celent believes represent the current state of the industryFidelity, the Principal Group, Transamerica, Wachovia and ExpertPlan.

"While most areas within the financial services industry cut IT budgets during the past two years, 401(k) IT spending has remained at or near the same levels during the past two years despite market conditions" states Celent senior analyst

Pamela Brewster, co-author of the report. "Technology spending has been imperative in order to meet the ever-increasing demands of sponsors while keeping costs in check. Moreover, given the "keeping up with the Jones" mentality within the industry, the pressure to enhance current features or create new capabilities is great."

According to the study, Celent estimates the top 50 401(k) providers spent US$132.5 million in 2003. Of that amount, about two-thirds was spent on enhancement to existing features and the remainder on new initiatives

Among the technology enhancements and innovations, the report focuses on the move towards improved web capabilities for plan sponsors and participants, paperless initiatives, multi-channel advice capabilities and the adoption of XML and web services. Additional focus is given to the rise of managed portfolios and how technology is facilitating this service. "Whereas in the past, the level of customization needed for each portfolio would take several hours and be costly, todays technology allows for the delivery of mass customization at low cost," states senior analyst Craig Weber, co-author of the report. "Most of the providers offering managed portfolios charge between 35-65 basis points for this service." Celent believes that a majority of plans will offer these portfolios by the end of the decade.

The report also highlights changes in the e401(k) marketplace. Whereas two years ago start-ups were leading the charge, today those start-ups have either disappeared or changed their focus. Indeed, serving the small plan market profitably remains a challenge.

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