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Ever since the financial crisis, big banks have taken a lot of heat from irate legislators, taxpayers, and customers. As banks search for ways to try to recover from the profits they've lost, they've come up with one promising idea to tap into a multitrillion-dollar market: managing employer-sponsored 401(k) retirement plans.
JPMorgan Chase (NYSE: JPM ) , Wells Fargo (NYSE: WFC ) , and Bank of America (NYSE: BAC ) are reportedly staffing up and bulking up their technology in an attempt to muscle in on the $2.9 trillion retirement-plan market. In doing so, they face an uphill battle to try to grab a bigger piece of the 401(k) pie from the current top three administrators, Fidelity, Vanguard, and Aon's (NYSE: AON ) Aon Hewitt.
What's behind the move
It's not hard to understand why banks are trying to get into 401(k) management. Not only are 401(k) assets growing rapidly, but they also tend to be more stable than money in checking and savings accounts. Once their employer sets up a 401(k) plan with a particular administrator, workers don't have any ability to shop around for a better deal. Typically, the only time workers can move assets around is after they leave their job. That stickiness attracts banks, big time.
At the same time, banks face significant threats to more traditional revenue sources. Last year, Bank of America said that the combined impact of credit card reform, debit card fee limitations, and other reductions in fee income would cost it billions of dollars.
Those threats have forced banks to turn to other potential sources of income. Initiatives from Capital One (NYSE: COF ) and US Bancorp (NYSE: USB ) as well as Wells and B of A to expand their prepaid card offerings seek to get around some of the limitations on debit and credit cards. American Express (NYSE: AXP ) has added fees and penalties to some of its rewards cards, while some other banks have reduced reward programs and charged annual fees for their cards.
But 401(k) administration could be particularly lucrative for banks. Not only would they earn income from managing retirement money throughout people's careers, but they would also have an inroad to hang onto those assets through an IRA rollover when workers retire or switch jobs. Combined with other cross-selling opportunities, building relationships with affluent 401(k) participants could prove extremely profitable for banks.
What it means to you
For many employers, the decision of which 401(k) manager to use boils down to cost. But low costs to your employer don't necessarily translate to low costs for you. Some 401(k) management companies market their services with no-cost options for employers -- fully intending to make up for lost revenue by imposing higher asset-based fees directly on workers' plan accounts.
From your standpoint, you're better off looking into the quality of the investments that your plan offers. Because Wells Fargo and JPMorgan Chase already offer retirement-oriented target date mutual funds, you can look at their track records to see what their 401(k) offerings might look like. Research from Morningstar suggests that although the level of fees that banks would impose would almost certainly exceed Vanguard's offerings, they would be roughly comparable to Fidelity's fees. Unfortunately, the 6% long-term average annual returns on the two banks' overall fund offerings lag behind the 7% level of Vanguard and Fidelity.
Perhaps most importantly, most workers aren't likely to see big changes to their existing plans at work. Fidelity claims a 97% retention rate among the businesses whose retirement plans it administers, and given the regulatory and recordkeeping hassles involved in switching 401(k) administrators, banks have a big challenge ahead of them to try to lure business away from their well-entrenched competitors. That may not be good news for them, but if you're happy with your 401(k) plan now, then keeping the status quo may well give you the best result.
More to come
As long as banks remain under fire for their more unpopular profit-producing practices, expect to see them continue to seek new ways to make money. Be sure to keep an eye on your employer -- and don't be surprised if you see moves to a different plan administrator at some point in the future.