Amid outflows from its retirement fund share classes, American Funds is kicking its 401(k) business into high gear and courting advisers.
Over the past year, American Funds has quietly expanded the selection of nonproprietary funds available to advisers and begun allowing advisers to outsource fiduciary responsibility for plan oversight to a third party.
Last summer, the company, which is owned by the Capital Group of Cos. Inc., also launched an advertising campaign aimed specifically at advisers in the retirement space.
“We haven't made the marketplace aware of our thoughts, and we haven't had a prominent voice in the marketplace,” said Bill Anderson, senior vice president of the retirement business at American Funds. “Advisers, consultants and plan sponsors want to hear more from us, and we're making sure that when we have a point of view, we're more deliberate in getting that out.”
To be sure, American Funds is a small player in the 401(k) arena.
It provides record-keeping service to plans with about $40 billion in assets, compared with $920 billion for industry giant Fidelity Investments. American Funds oversees about 35,000 corporate 401(k) plans.
American Funds is focusing on adviser-sold 401(k) plans against the backdrop of lost assets from its retirement plan share classes. After experiencing net outflows of $19.2 billion in 2011, the share classes lost an estimated $19.5 billion in 2012, according to Morningstar Inc.
And the trend continued in the first two months of this year when $687.8 million exited American Funds' retirement share class offerings, Morningstar said.
American Funds disputes Morningstar's findings but hasn't provided its own flow data.
As part of its strategy to build its 401(k) business, American Funds last year broadened its Recordkeeper Direct offering by adding a multifund version, which allows sponsors to choose from a variety of managers, including J.P. Morgan Asset Management and The Vanguard Group Inc. These investments are offered via a group annuity issued by Great-West Life & Annuity Insurance Co. and privately labeled for American Funds.
Fund lineups can have a mixture of 60% proprietary funds and 40% nonproprietary.
Last year, American Funds teamed up with Wilshire Associates Inc. to allow brokers to outsource fiduciary investment management responsibilities to Wilshire. Other 401(k) providers, particularly insurance companies, have made similar moves in the past 18 months.
Despite these moves, the company has a rocky road ahead.
American Funds was late to the party on expanding the fund offerings on its Recordkeeper Direct platform. By comparison, its third-party- administrator program, PlanPremier, has made outside mutual fund offerings available for more than 10 years.
Further, some advisers would like to see the company take a more hands-on approach — for example, by sending out representatives to help the plan sponsors they serve.
“American Funds doesn't necessarily have local service teams in every marketplace or geographic region to service the plan, but other vendors can send along someone to come in and help do education meetings,” said Alexander G. Assaley, an adviser with AFS Financial Group LLC.
In response to adviser requests, the company launched a participant education service through its divisional wholesalers last year, according to American Funds spokesman Ken Masson.
“In many ways, American Funds is bringing itself to a modern platform, and it should help them,” said Geoff Bobroff, president of Bobroff Consulting Inc. “It puts them in a position to have a more competitive offering for newly established small and midsize plans. But it's going to be an uphill battle.”
STIFF COMPETITION
In the small- to midsize-plan market, American Funds is up against established insurance companies, such as The Principal Financial Group Inc., John Hancock Financial Services Inc. and MassMutual Life Insurance Co., which has bolstered its firepower by acquiring The Hartford Financial Services Group Inc.'s retirement plan business.
American Funds has some momentum in its favor, thanks to investors' moving back into equities. For instance, the firm picked up net inflows of $1.6 billion in the first two months of the year, according to Lipper Inc. Such gains burnish the company's reputation among advisers, who know that the firm had experienced steady net outflows from its equity funds going back to 2009.
Mr. Assaley noted that American Funds' move to add outside managers to its fixed-income roster for 401(k)s was a positive development, especially considering that American Funds is largely an equity shop.
“You get [Pacific Investment Management Co. LLC], J.P. Morgan and Vanguard in fixed income, where American Funds has struggled,” he said.
Those struggles won't necessarily deter it from faring well on the 401(k) side of the business, where name recognition and open architecture go a long way with plan sponsors and advisers.
“It doesn't bother me that they're not top dog,” said Kevin Berenzweig, a retirement plan adviser with Securities America Inc. “American Funds is probably a good story to tell [to plan sponsors] because they're well-known.”
Indeed, advisers also like name recognition. Cogent Research LLC surveyed 520 401(k) advisers last summer and found that American Funds came in first in “favorable impression of 401(k) plan providers,” moving up from third place in 2011. Fidelity and John Hancock followed in second and third place. On the investment management side, however, American Funds came in fourth place, losing to first-place winner Pimco, runner-up BlackRock Inc. and Vanguard in third.
“Advisers may have an established relationship on the retail side and they're seeing that they can carry over that relationship and service level with their 401(k) business,” said Linda York, practice director of syndicated research at Cogent. “The most important driver of adviser loyalty is choice and flexibility in the investment options. They're late to the game in open architecture, but if they had a strong relationship with advisers, maybe they didn't need that as an offering in the past.”
