Banks Go After Orphan Retirement Funds

BOSTON (TheStreet) -- During the past three years, banks have started to chisel away at the retirement plan market share dominated by investment firms.

Earlier this month, a joint study by BAI Research and Financial Research Corp. concluded that banks "notched big gains in asset capture." Banks gained significant traction in the rollover market with capture rates reaching 33%, up from 23% from 2008. In 2007, their share of rollovers was 18%.

During that time period, investment firms saw their capture rate for rollovers decline from 67% to 57%. Insurance companies have remained stable with a 9% capture rate in 2008 and 2009.

This competitive landscape could become even more so in years to come as banks vie with investment firms for the more than $1 trillion in so-called orphan 401(k)s held by investors. These plans, retained from a previous job, have become increasingly common.

The study found that 35% of those it surveyed held at least one orphan 401(k) account in 2009; 12% of those surveyed had multiple orphaned accounts. Inertia was the top reason cited for failing to rollover these assets, although some investors said they choose to do nothing because they like the product offerings and low cost of a past plan.

This is the third year that the firms have compiled the report and it draws heavily upon the results of an online survey of more than 2,500 mass affluent individuals between the ages of 35 and 70 with investable assets of at least $50,000.

Luis Fleites, vice president and director for retirement markets at Financial Research in Boston, sees the inroads made by banks as the result of their existing customer relationships and the avoidance of risk exhibited by post-recession investors.

"Obviously, banks do offer the more aggressive or traditional investment products that the other places have," he says. "But a good portion of the bank benefit came from their conservative nature, being FDIC insured and their guaranteed products."

For banks denoted as the primary bank, overall wallet share capture among customers with a retirement relationship (76%) is consistently and significantly larger than that of customers without such a relationship (26%).

Fleites said the fact that banks continued to make inroads in 2009 may indicate that their increasing share of the retirement market is not an aberration. The challenge for both large institutions, like Bank of America ( BAC) and Wells Fargo ( WF), as well as smaller banks, is to maintain the momentum by aggressively marketing their services and improving the quality of product offerings in order to remain competitive.

"Banks are expanding their services and their lineups and starting to understand that retirement is a very big area that they need to be present in," he says. "As banks start to offer more in this space it just makes sense that their market share is going to increase just because of the contact they have with their client base."

Although insurance companies have traditionally finished third in the race for retirement assets, the increasing popularity of annuity products could level the playing field in the months ahead.

Gary Bhojwani, chief executive of Allianz Life Insurance of North America, part of global financial services firm, Allianz ( AZ), sees annuity providers charging more aggressively into the 401(k) space.

"It's a huge opportunity," he says. "I think that the next big frontier for us, and our industry, is how to offer annuities within a 401k wrapper. For our part, I'd like to be in a position to really capitalize on this within the next year or so."

-- Reported by Joe Mont in Boston.

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