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  1. 1. CENTER FOR DUE DILIGENCE P.O. Box 8 • Western Springs, Illinois 60558 (630) 662-0144 • Fax (630) 662-0151 Consulting • Research E-mail: Competitive Analysis Web: CONFIDENTIAL Date: May 17, 2002 To: CFDD Clients Subject: American’s PlanPremier Program: A Consolidation Monster From: CFDD The Capital Group Companies are among the world’s largest money managers and the 3rd largest mutual fund company, but the wholly owned American Funds Group is also the largest distributor-sold fund company. The Capital Group is also a large, privately owned, conservative and slow moving organization. The firm is also well known for their long term value orientation, global research, multiple portfolio management system, experienced personnel and low fund expenses. As noted, the company is privately owned and they don’t advertise, seek media attention or compete with their customers. The company is uniquely focused on meeting the needs of their customers and their value orientation, low turnover, performance-based compensation, bottom-up research, teamwork and experience has delivered unmatched performance over multiple time periods. The Capital Group is one of the few investment firms that has delivered distinguishing performance and as of 12/31/01, the firm reported about $525 billion in assets under management. It’s also worth noting that the Capital Research & Management Company, the investment advisor to the American Funds, accounted for about $325 billion of the total assets under management. DC Plan Presence The Capital Group is also one of the largest managers of retirement plan assets and DC plan mutual fund assets were reported at $83 billion as of 12/31/01. Center for Due Diligence
  2. 2. American’s PlanPremier Program: A Consolidation Monster Page 2 May 17, 2002 Of the total $83 billion in DC plan assets, we would estimate investment only business at about $65 billion and 401(k) assets appear to total about $29 billion. According to P&I, the top managers of “mutual fund” assets held in DC plans as of 12/31/01 were: Fidelity ($287 billion), Vanguard ($132), Capital Research ($83), Putnam ($40), T. Rowe Price ($35), Janus ($33), Merrill Lynch ($24), MFS ($16) and Prudential with $15 billion. Specialists should, however, note that if “all” investment vehicles were included, the top ten DC plan managers would also include TIAA-CREF, State Street Global and Barclays Global. Specialists should further note that there are also other very large institutional tax-exempt managers that may not have much DC plan presence like Deutsche, J. P. Morgan Fleming, Morgan Stanley and Northern Trust. 2001 & DC Plan Assets The year 2001 was the worst year for the stock market since 1973 and the top twenty five managers saw their total DC plan assets drop by about 7% last year. The 7% drop is, however, somewhat misleading because while stocks assets went down, fixed income assets went up. Nevertheless, Vanguard (2%) and the American Funds (6%) were the only top ten managers to report an increase in DC plan assets under management last year. Fixed Income managers like PIMCO also had a good year, but growth-oriented managers like Putnam and Janus were hit hard. Both firms reported a drop in DC plan assets of about 15%, but Putnam’s companywide assets dropped about 28% last year. CEO compensation aside, Putnam has merged portfolios, changed management teams and refocused investment objectives to lower risk. The firm has also combined the DC and DB plan sales and marketing group. Nevertheless, Putnam is faced with a public relations problem that will take time to resolve. Feasting at the same growth trough, MFS also saw the majority of their largest funds drop from the top of their investment objectives to the bottom in a short period of time. The damage that hit so many of the big MFS portfolios may have been exacerbated by centralized research because many of the funds held the same stocks. Center for Due Diligence
  3. 3. American’s PlanPremier Program: A Consolidation Monster Page 3 May 17, 2002 Making a long story short, stock selection is generally what makes fund performance go up and down and most of the fallen star managers ignored the importance of valuations. Few realize it, but what funds “don’t” own can also have a dramatic impact on performance when compared to other funds in the same investment objective. We feel the same way about hedging and international funds, i.e., something else to go wrong. MFS is still drawing new money, their largest funds have not experienced a meltdown and they have increased their focus on other investment disciplines, but they still appear to own the shares of many of last year’s losers. MFS also still maintains a devotion to growth stocks. View From The Top Sponsor decision making will be increasingly driven by performance and given our guarded outlook, the American Funds’ investment approach could reign supreme in the years ahead. The challenges facing other premier distributor-sold fund companies, like Putnam and MFS, will also benefit the American Funds Group. Unless other vendors change their programs, the structural superiority of American’s new Plan Premier Program will also further accelerate the firm’s asset gathering momentum. It’s also interesting to note that the four largest fund companies, i.e., Fidelity, Vanguard (shareholders), American and Putnam (Marsh & McLennan) are all privately held. Vanguard, Fidelity and American have all pursued different paths to growth, but it’s important to note that Vanguard is a cooperative owned by shareholders rather than a profit-oriented investment firm. The top fund companies have also grown internally, not through acquisitions, and the money management industry is far more fragile, i.e., human capital can always walk out the door, than generally recognized. Good portfolio management certainly requires accountability, but rather than hold one “star” manager accountable, American holds multiple managers of the same portfolio accountable and this is a key component of their success. Center for Due Diligence
  4. 4. American’s PlanPremier Program: A Consolidation Monster Page 4 May 17, 2002 Indexing is also cyclical and managers often beat the international and small-cap indexes, but beating the S&P has been a challenge. Going forward, however, we do not expect the market to be dominated by the large stocks. Vanguard has been growing faster than Fidelity for a number of years and the firm attracted about $319 billion in new stock and bond fund deposits since 1990. Fidelity and American captured $243 billion and $154 billion respectively, but we believe the growth in indexing is peaking. In summary, unless Fidelity makes all their retail funds available in broker-sold share classes, the American Funds, not Vanguard, will be the nation’s largest fund company in a few years. FIRSCO had a good new business year in 2001, but their total DC plan assets dropped about 4%. The firm’s recordkeeping mousetrap is without equal and FIIS has done a good job with the Premium Program, but Fidelity could benefit from thinking beyond proprietary investment management, recordkeeping capabilities and the party line. The success of the American Funds also validates the power of broker-sold distribution and investor willingness to “pay” for advice. Bull markets and a soap opera media hide a lot of sins, but many firms are still saddled with less than competent management and fail to grasp these basic fundamentals. The Quiet Giant & Performance The CFDD only tracks the performance of proprietary mutual funds, excluding money market & stable value funds, that are most commonly used or recommended to participant-directed DC type plans. (See Core Fund Analysis). Ignoring SPDRs, the American Funds have five funds among the nation’s ten largest funds, more than any other fund company, and all five are generally used or recommended to 401(k) type plans. American’s flagship funds are large value type funds and the firm doesn’t offer sector/specialty funds or much in the way of small and mid-cap funds. Center for Due Diligence
  5. 5. American’s PlanPremier Program: A Consolidation Monster Page 5 May 17, 2002 Twenty two of American’s twenty nine funds are offered to DC type plans and the most commonly used funds, ranked by risk (standard deviation), are: • Bond Fund Of America • Income Fund Of America • High Income rust • Capital Income Builder • American Balanced • Investment Company of America • Washington Mutual Investors • New Perspective • Euro Pacific Growth • Growth Fund Of America The American Funds may have some issues with the way the fund reporting services classify their funds and they categorize the aforementioned funds under the following umbrellas: Bond (2), Balanced (1), Equity-Income (2), Growth & Income (2) and Growth (3). Morningstar classifies the same funds as: Intermediate Bond (1), High Yield Bond (1), Domestic Hybrid (2), Large Value (2), Large Growth (1), World Stock (1) and Foreign Stock (1). Cutting through the fog, all ten of American’s most commonly used funds in DC type plans had track records of at least ten years as of 3/31/02. Seven of the ten funds were in the top quartile for the trailing 1 year period, seven for the trailing 3 year period, nine for the trailing 5 year period and nine for the trailing 10 year period. Eight out of ten of the most commonly used funds also had fifteen year track records and based on Morningstar’s Investment Objectives, all eight were in the top quartile for the 15 year period ending 3/31/02. As noted, sponsor decision making will be increasingly driven by performance and the American Funds have generated performance that is nothing short of stellar. Indeed, investors are approaching Holy Ground when “large” funds generate top quartile performance over multiple time periods with low volatility Long term results are not generated by accident and while Fidelity’s Johnson family is well known, American’s founding Lovelace family is rarely mentioned. It was, however, Jon B. Lovelace Jr., the founder’s son, that initiated the multiple manager system in 1958. Center for Due Diligence
  6. 6. American’s PlanPremier Program: A Consolidation Monster Page 6 May 17, 2002 The typical American Fund has six to eight managers, called counselors, that operate independently, so each fund is actually a number of mini-portfolios. American is a flat organization and research is viewed as a career rather than a stepping stone. Analysts also generally manage 20% of each portfolio and while each fund has a lead manager, there are no gunslingers, rock stars or Peter Lynch types at American. Fund managers can always get lucky and hit on the right investment themes for the times, but the multiple portfolio counselor system works because it provides diversification, consistency, continuity and manageability. The CFDD doesn’t do commercials, but American’s turnover is one-third of the industry average, scale helps keep expenses low and their growth & income funds have paid rising dividends almost every year since inception. American also requires many of their funds to select stocks that offer above-average yields and while growth stocks don’t pay those warm and fuzzy things, dividends have provided about one-third of the S&P’s historic total return. As a private company, American also doesn’t have to be concerned with short term earnings and their compensation model is based on results over several years rather than annual or quarterly returns. In short, American’s consistent approach has generated consistent performance with low volatility. Pain is the ultimate catalyst for change and the American Funds provide brokers with a great story to tell plan sponsors. DC PLAN PROGRAM MENU: RecordkeeperDirect The RecordkeeperDirect (formerly PlanDirect) is a “quasi-bundled” program with in-house recordkeeping on the non-proprietary TRAC-2000 System. Administration and compliance are currently outsourced to about 150 TPAs, but going forward, American will work with new TPAs as long as they transmit electronically. The program currently has no minimum, but this will probably change. The RecordkeeperDirect is, however, limited to plans with less than 400 EEs. Center for Due Diligence
  7. 7. American’s PlanPremier Program: A Consolidation Monster Page 7 May 17, 2002 Pricing has become more competitive and while the program is currently limited to the American Funds, alliance fund flexibility is expected. If American continues to accept small plans, a brokerage option may not, however, be offered. Going forward, the RecordkeeperDirect Program is limited to “R” shares. RecordkeeperConnect The RecordkeeperConnect, formerly PlanConnect, is somewhat of a “turnkey” program with “full” outsourcing. Unlike most turnkey programs, the RecordkeeperConnect is, however, marketed with “multiple” national recordkeeping alliance partners. About twenty national recordkeepers are actively participating on a meaningful basis, but primary alliance partners include: Key, Ceridian, DAC, CPI, Digital Solutions, Prudential, First Union, BISYS (still the largest by far), Alliance Benefit Group (Invesmart rollup), LAWCO and Invesmart. American does not impose minimum program requirements, but pricing, parameters and recordkeeping systems vary by alliance partner. Multifund flexibility is available through American’s recordkeeping alliance partners, but few, if any, have negotiated prospectus NAV requirements and CDSCs. A brokerage option may also be available through select alliance partners. Unlike the RecordkeeperDirect or the PlanPremier Program, the RecordkeeperConnect is available with “A” or “R” shares and American remains fully committed to the unbundled program. Many specialists prefer the unbundled approach and while this may change, the RecordkeeperConnect has captured more than twice as much business as the RecordkeeperDirect Program. NAV purchases of “A” shares still require $1 million or 100 EEs and the standard “A” share commission payout still applies, but going forward, the sub-TA fee has been reduced from $12 per position to 5 basis points. Rollovers from plans that offer American Funds may still be invested in “A” shares at NAV, but the firm will no longer pay the 1% commission on accounts under $1 million. Center for Due Diligence
  8. 8. American’s PlanPremier Program: A Consolidation Monster Page 8 May 17, 2002 As noted, “A” shares are still available to the RecordkeeperConnect, but American believes their “R” shares will give them the flexibility to meet the long term revenue needs of TPAs. PlanPremier The PlanPremier is somewhat of a bundled program, but it is really a “turnkey program with wraparound American Funds personnel.” FASCorp is the private labeled recordkeeping partner and they are responsible for recordkeeping, administration and compliance. American is, however, responsible for service delivery, conversion and “ongoing” client relationship management. The PlanPremier Program is only available with “R” shares and while American does not impose any minimum program requirements, the program is not priced competitively for plans with less than 100 participants. The program also offers an eleven family multifund alliance “without” additional threshold requirements or costs. The alliance funds pay prospectus commissions and American appears to have negotiated the NAV requirements and prospectus CDSCs applicable to the alliance funds. Plans must use at least seven American Funds, but up to five alliance funds may also be offered. Again, the five alliance funds are available “without” threshold requirements, wrap fees or additional costs. The alliance funds also offer prospectus commissions and prospectus CDSCs may not apply. Additional NSCC flexibility is also available to plans with over 100 participants. Non-standard pricing would apply to the additional flexibility, but if American receives the sub-TA fees, there would not be much of a price adjustment. A Harrisdirect brokerage option is also available without additional threshold requirements. The trail only “R” shares are available with open architecture, but expense ratios, commissions and recordkeeping offsets vary by share class. The RIA type “R”-5” share class does, however, require at least $1 million. Center for Due Diligence
  9. 9. American’s PlanPremier Program: A Consolidation Monster Page 9 May 17, 2002 As noted, the share class will have a meaningful impact on billable pricing which is also driven by both average account balances and participants. Given that FASCorp is the private labeled recordkeeping alliance partner, let’s discuss FASCorp before further discussing the PlanPremier Program, “R” shares and billable pricing. _______________________________ FASCorp The Denver-based Financial Administrative Services Corporation (FASCorp) is a wholly owned subsidiary of GWL&A. FASCorp was established as a separate company in 1993 and they are a leading provider of private labeled recordkeeping and administrative services to financial institutions servicing the DC plan market. FASCorp has the ability to customize/tailor their services and their voice response system, internet site, correspondence and participant statements all reinforce their alliance partner’s identity. FASCorp does “not” provide direct services to plan sponsors, but their private labeled services are used by banks, insurance companies, brokerage firms and mutual fund companies. FASCorp services a complete line of defined contribution programs that include 401(k), money purchase/profit sharing, non-qualified, 457 and 403(b) plans. FASCorp can also accommodate institutions offering a wide variety of investment vehicles, including mutual funds, variable & fixed annuities, CDs, GICs, stable value funds, pooled funds, company stock and brokerage. FASCorp employs over 900 people and they currently service about 11,000 plans with $45 billion in assets and 2.2 million participants. The open architecture of FASCorp’s proprietary system allows them to offer cost effective services to plans of all sizes and flexibility without the need for custom programming. Center for Due Diligence
  10. 10. American’s PlanPremier Program: A Consolidation Monster Page 10 May 17, 2002 The proprietary FASCorp recordkeeping system also fully integrates plan and participant level activity thus eliminating the need for separate trust accounting and reconciliation. FASCorp has the ability to integrate multiple fund families and they currently administer about 1,000 mutual funds from various fund families. All transactions are updated and processed on a daily basis. Transfers received before the close of the market are processed using that day’s share price, but according to FASCorp, timing is dependent on mutual fund cut-off times for trading purposes and we aren’t sure what that means. FASCorp’s proprietary recordkeeping system, Innovative Strategic Investment System (ISIS), was designed and developed by FASCorp. FASCorp has been providing recordkeeping services since 1984 and ISIS was completed as an all-encompassing upgrade and system rewrite in 1991. ISIS is a real-time system available 24 hours/7 days per week. The voice response system, participant internet and sponsor access are all fully integrated and display real-time data. The ISIS system is constantly enhanced to ensure clients are offered comprehensive services and FASCorp believes their combination of software, hardware and client-server architecture gives them the flexibility to provide high quality services at minimum cost. FASCorp developed ISIS under both the open systems forum approach and client-server architecture for maximum flexibility. FASCorp also notes that many companies have yet to make the investment to either production relational database systems or client-server architecture. In summary, FASCorp benefits from stable ownership, scale and recordkeeping is a core business. FASCorp is also well managed, operates with a real business plan and is experienced with private labeling. FASCorp also offers a sophisticated proprietary recordkeeping system with open architecture and state of the art technology. Roles, Responsibilities & Preparing For Volume The PlanPremier Program is marketed as a bundled program, but it is really a turnkey program with wraparound American Funds personnel. Center for Due Diligence
  11. 11. American’s PlanPremier Program: A Consolidation Monster Page 11 May 17, 2002 It is, however, important to note that American is assuming responsibility for service delivery. Unlike the BISYS Program, an American Funds’ coordinator will also be the ongoing point of contact. Unlike the RecordkeeperConnect Program (formerly PlanConnect), the PlanPremier Program has only “one” alliance partner, i.e., FASCorp. As noted, FASCorp is a premier provider of private labeled recordkeeping services. We don’t know who FASCorp’s other alliance partners are or what percentage of their staff will be dedicated to the American Funds, but we do know that the American Funds deal is very important to FASCorp. The costs and barriers of entry to the recordkeeping business are significant and the margins are low. Recordkeeping is also often perceived as a commodity, but it is very difficult to deliver and informed sponsors are increasingly demanding robust functionality, ease of use, cutting edge technology and reasonable costs. American was also rumored to be conducting due diligence on Hewitt, but given the aforementioned, it’s not surprising to see them pursue a well planned approach to private labeling with FASCorp. There has always been more than one path to success and more than one successful business model. Success is, however, not possible without the right management. Indeed, if management is right - at all levels - all other things will fall into place. The American Funds have not always had good management in the retirement plans area and they were slow to react to problems in the past. However, American now operates with vastly improved retirement plans management and they also appear to have more decision making authority. American has also committed a huge amount of time, effort and resources to getting the PlanPremier Program right before relaunching the program. One thing for sure, if they do get it right, the marketplace will change and the fringe players will de disadvantaged. If they don’t get it right, new resumes will no doubt be on the street. Center for Due Diligence
  12. 12. American’s PlanPremier Program: A Consolidation Monster Page 12 May 17, 2002 As far as we can tell, the American Funds people will handle the conversion, client relationship, coordination and tutorial roles. FASCorp will be responsible for the call center, enrollment, loan processing and other processing. In short, FASCorp is responsible for functionality. Integrated trustee services are also provided by Capital Bank & Trust, an American Funds affiliate. To the best of our knowledge, neither party will offer ala carte enrollment services, but as always, discretionary wholesaler assistance will be available. American has also not stratified their wholesaler force and a large case/institutional type presentation team is not currently available to the PlanPremier Program. In preparation for volume, American has, however, completely revamped their proposal format and significantly increased their internal training. American has also hired a significant number of retirement plans coordinators and specialists to handle the expected volume. The American Retirement Plans Coordinator is a key member of the Service Team and functions as the primary point of contact. The coordinator remains involved with the plan and coordinates activity between the plan, the prior recordkeeper and the specialist. The coordinator’s role is important and it’s important to note that American manages the overall transition and ensures an efficient conversion with minimal blackout. The coordinator also implements plan design changes, works with the specialist to develop plan specific educational strategies and keeps the plan up-to-date re legislative and regulatory changes. In addition to the staff in training, American’s goal is to stay six months ahead of the curve. The aforementioned is important because American had only a small number of specialists and no coordinators to service the BISYS Program. Center for Due Diligence
  13. 13. American’s PlanPremier Program: A Consolidation Monster Page 13 May 17, 2002 According to American, the BISYS Program was primarily plagued with contribution processing problems, not volume, and American was not involved in the recordkeeping or administration. This may be true, but brokers also note that they had major conversion problems and were frustrated with the pooled service format, i.e., the disconnect between American and BISYS. As a result of the BISYS experience, it’s important to note that the PlanPremier Program will only accept on-line processing and American is assuming full responsibility for the delivery of services. Most brokers would also agree that when American takes responsibility for something, they deliver. In addition to taking responsibility for service delivery, American has also teamed the relaunch with the rollout of the economically viable family of “R” shares for retirement plans. The PlanPremier Program also uses paperless loan processing and testing will be on a different system than used by some of FASCorp’s other alliance partners. It’s also important to note that American has been running a small number of plans on the FASCorp system for the last few years and they have not experienced any processing problems. _______________________________ PlanPremier Program As mentioned, the PlanPremier Program is a turnkey program with private labeled recordkeeping from FASCorp and wraparound American Funds personnel. The program has no minimum requirements, but minimum pricing does apply and the program is not priced competitively for plans with less than 100 participants. The PlanPremier is only available with “R” shares at NAV and brokers may choose from five different share classes, each with different expense ratios, trail commissions and recordkeeping offsets. Center for Due Diligence
  14. 14. American’s PlanPremier Program: A Consolidation Monster Page 14 May 17, 2002 The program offers unusual investment flexibility for a premier fund company program and the eleven family multifund alliance includes all or most of the taxable funds from: AIM, Alliance, Davis, Federated, FT, INVESCO, Janus Adviser, MFS, Oppenheimer, PIMCO and VK. The program is available with up to fifteen funds at the plan level and while seven American Funds must be offered, sponsors may offer up to five alliance funds without “any” threshold requirements, billable costs or wrap fees. The PlanPremier is not a typical program and specialists should note that American appears to have negotiated the NAV requirements and prospectus CDSCs on the alliance funds. In addition to distinguishing proprietary fund performance and liberal alliance fund flexibility, the PlanPremier Program is also distinguishing because to the best of our knowledge, no other distributor-sold fund company program offers prospectus commissions and negotiated CDSCs on their alliance funds. The world is, however, getting more complicated and specialists should note that most multifund alliances will no longer be available with share class consistency. In other words, specialists need to be aware of the varying commissions, NAV requirements and prospectus CDSCs applicable to different share classes in non-negotiated multifund alliances. Unlike most of the open architecture type programs, American also provides the education, communication and enrollment materials for the alliance funds. A Harrisdirect brokerage option (formerly CSFBdirect & DLJdirect) is also available without “any” threshold requirements, but a $2,000 plan level cost may apply. Multiple source brokerage is not expected and participant level costs, commissions and transaction fees also apply to the brokerage option. The PlanPremier Program does not offer ala carte on-site enrollment services, but key producers are likely to get the support they need. The customized/personalized enrollment material is terrific stuff, American leads the industry with this medium, and their goal is to make the enrollment process non-dependent on multiple enrollment meetings. Participants may enroll through the VRU or on-line and both the VRU and live operator services are available in Spanish. Live operator services are also available from 9 a.m. to 8 p.m. Eastern time. Center for Due Diligence
  15. 15. American’s PlanPremier Program: A Consolidation Monster Page 15 May 17, 2002 Comprehensive Internet capabilities, including asset allocation models, portfolio rebalancing, dollar cost averaging tool and loan modeling/initiation, are also available. The Financial Engines service also appears to be available. Like the rest of the industry, American should, however, further develop their rollover strategies and get participant phone numbers on the enrollment forms. “R” Shares Joining Putnam, FT and Oppenheimer, American has introduced a new Retirement Plan Share Class Series. The “R” shares consist of five share classes and they are available with open architecture. In other words, brokers and sponsors may select the share class that best meets their needs. The “R” shares are only available at NAV and they are not subject to ongoing CDSCs often applicable to NAV purchases for plan discontinuance. The “R” shares have different expense ratios, asset-based commissions and recordkeeping offsets. As a result, the share class selected could have a significant impact on billable pricing. Open architecture comes with a price and some specialists have noted that the “R” shares could be subject to share class conflict. American continues their policy of honoring all proposal requests, including proposals using different share classes, and plan sponsors could receive multiple American Funds’ proposals with different pricing. American’s wholesalers will, however, only present in conjunction with the broker that submitted the first proposal request. As noted, other specialists can still get proposals, but they must make the presentations on their own. The “R” shares offer unprecedented pricing flexibility for brokers and sponsors, but they also provide American with the vehicle to offer high quality retirement plan services with ongoing economic viability. As noted, the PlanPremier and RecordkeeperDirect are now only available with “R” shares and the following table highlights the share class variations. Center for Due Diligence
  16. 16. American’s PlanPremier Program: A Consolidation Monster Page 16 May 17, 2002 Keep in mind that the share class expense ratios shown below are estimates based on three year projections, but expenses will no doubt be higher in the first year. Trail Average Estimated Share Class Commissions Expense Ratio R-1 1.00% 1.54% R-2 0.75 1.48 R-3 0.50 1.10 R-4 0.25 0.77 R-5 -0- 0.47 ________________________________ “R” Shares & Billable Pricing As noted, the share class selected will directly affect how the sponsor pays for plan services. In short, “R” shares with lower expense ratios may require the sponsor to pay higher out-of- pocket costs. Specialists should, however, note that when comparing the pricing of different programs, billable pricing must be related to fund expense ratios, wrap fees, commission add-ons, alliance fund availability, alliance fund cost, total commissions, enrollment services and plan discontinuance, including stable value MVAs. Features and service must also be compared and it’s important to note that apples and oranges can’t be compared. To clarify the “R” share pricing variations, we have constructed the following table that compares the billable pricing resulting from the different “R” shares over different plan scenarios (participants & assets). Center for Due Diligence
  17. 17. American’s PlanPremier Program: A Consolidation Monster Page 17 May 17, 2002 Billable Recordkeeping/Administration Pricing 50/$1 Million 100/$1 Million 200/$5 Million 300/$12 Million “R”- 1 $ 9,500 $ 8,000 $13,000 $13,000 “R”- 2 7,000 -0- -0- -0- “R”- 3 7,500 5,000 7,000 4,000 “R”- 4 9,500 8,000 13,000 13,000 “R”- 5 11,000 9,000 16,000 14,000 _______________________________ The aforementioned pricing includes the $1,000 annual trustee fee and assumes twelve funds. Additional funds are priced at $120 per fund annually. A $1,000 fund setup and fund elimination fee would also apply. A $2,000 annual plan level fee may also apply to the brokerage option. As you can see, pricing is driven by the various “R” shares, participants and account balances. The per-participant pricing for “R”-1 share plans over 100 participants would zero out with $80,000 average account balances, “R”-2 is designed to price out at zero, “R”-3 would zero out with $50,000 balances and “R -4 with $80,000 balances. Plans using the RIA type “R”-5 share class are, however, unlikely to obtain zero pricing. The plan level cost for the brokerage option would also be waived to plans over 100 participants using “R”-2 & “R”-3 shares with $50,000 account balances. Takeover fees are not included in the aforementioned pricing, but they are reasonable and are estimated to range from $2,000 - $3,000. The pricing also includes document, testing, form 5500, personalized enrollment material and unlimited payroll uploads. As you can see, pricing will have a big impact on where the PlanPremier Program will be sold and most specialists will no doubt lean towards the “R”-2 and “R”-3 shares. Center for Due Diligence
  18. 18. American’s PlanPremier Program: A Consolidation Monster Page 18 May 17, 2002 The “R”-2 shares are “C” type shares with a recordkeeping offset and a real marketing tool because specialists can zero out pricing on plans over 100 participants and receive a 0.75% trail with an average expense ratio of about 1.48% The “R”-3 shares are also attractive because specialists can obtain very competitive pricing and receive a 0.50% trail with “A” type share expense ratios of only 1.10%. In summary, American is not giving the program away and they have stopped trying to be all things to all people. FASCorp’s pricing model is based on a dollar per-participant model and as a result, they are flexible about revenue sharing. Some question the long term viability of that model, but American was definitive about not wanting an asset-based model. Asset-based models may work in good times, but they are a challenge in difficult times and American wanted FASCorp to build enough flat dollar pricing into their model to ensure a profitable relationship under all conditions. Concluding Observations As the nation’s largest distributor-sold fund company, American has scale and they are growing much faster than rival fund companies. The quiet giant has unmatched brand, distribution and their proprietary funds have delivered stellar results over multiple time periods with low volatility. Mutual funds are increasingly being viewed as commodities, but American’s funds are not commodities and the broker-friendly firm has done a good job supporting brokers. American is also uniquely positioned to capture investment only business and they reported $83 billion in DC plan assets at year-end. American’s DC plan assets were up 6% last year, a tough year for the industry, but only about 20% of their DC plan assets were in proprietary programs. American’s previous DC plan management failed to capitalize on major opportunities, but the new team has figured it out and they are keenly aware that this may be their last chance to take a bite out of the consolidation apple. Center for Due Diligence
  19. 19. American’s PlanPremier Program: A Consolidation Monster Page 19 May 17, 2002 Management remains the key to success, not systems, and the new team’s attitude and lack of arrogance are also quite refreshing. Management is also willing to listen and they are actively seeking feedback. The PlanPremier Program has been around for awhile, but after two years of intense work, American has relaunched a well planned, unique and meaningful retirement plans program. Given the past history with BISYS and the expected flood of proposal activity, specialists are, however, wondering if the relaunched PlanPremier Program will work. American has committed an enormous amount of time and resources to relaunching the PlanPremier Program and while they weren’t ready for BISYS, the CFDD believes they are ready for robust PlanPremier activity. In short, it looks like they got it right, but we will be monitoring conversions to verify this. The BISYS block of business has stabilized and American is “not” encouraging conversion business. American has also wisely developed policies and procedures to cope with a high level of conversion activity from existing BISYS plans. The PlanPremier Program is “not” a solution for plans with less than 100 participants, including plans with high account balances, and brokers need to understand that the FASCorp pricing model was designed to work under all circumstances. American is targeting plans with 100-750 participants and when teamed with “R”-2 or “R”-3 share classes, the PlanPremier Program sings like a choir boy. In summary, the PlanPremier Program is not a panacea, but a consolidation monster has been born and the Plan Premier Program will have an enormous impact on consolidation business. The moon and the stars are also lined up and specialists finally have a product to be excited about. The PlanPremier Program will no doubt generate some share class conflict and while it may lack off-the-shelf on-site enrollment, key producers are likely to get the support they need. American also lacks a large case presentation team, but the additional share class flexibility will allow more specialists to support plans with $1-3 million. Some of American’s “old” alliance partners may not be happy with the relaunch of the PlanPremier Program and some may have already turned on brokers, but American remains committed to their entire DC plan program menu. Center for Due Diligence
  20. 20. American’s PlanPremier Program: A Consolidation Monster Page 20 May 17, 2002 American simply can’t pay sub-TA revenue the way they have in the past and those that stacked the asset allocation model for the purpose of collecting excessive fees will definitely not be happy. It is, however hard to fault American for being fiscally responsible. Given the share class flexibility, American will also probably be more liberal in offering their funds to competing programs in the future. American’s PlanPremier alliance fund partners with good small and mid-cap offerings would also be wise to aggressively position/market their funds within the PlanPremier Program. American has eighteen outside QP wholesalers and an equal number of inside specialists supporting them. Like the rest of the industry, some of their wholesalers are great, some are average and some are just collecting checks. Unlike other fund companies, most of the top producing specialists are in American’s system, but they have not particularly targeted these specialists in the past. American’s wholesalers spend a lot of time with groupie type brokers, but specialists that have not placed unbundled or turnkey business with them because they prefer the bundled model have not received adequate coverage. The lack of coverage may be regional and in all fairness, the BISYS situation forced the American Funds wholesalers to seek out investment only type business and some may have a difficult time returning to the “full service” model. One thing for sure, the financial services industry is facing a permanent contraction and the American Funds Group is one of the few fund companies that can do more for their wholesalers than a top wholesaler’s relationships can do for their employer. ____________________________ Restricted and confidential. Not to be duplicated or distributed. © Copyright 1999-2002 Center for Due Diligence. All rights reserved. This information has been taken from sources believed reliable, but accuracy and completeness cannot be guaranteed. The information is for broker-dealer use only and should not be construed as an offer to buy or sell securities or any other investment. “In The Long Run, We’re All Dead” - Lord Keynes - Center for Due Diligence P.O. Box 8, Western Springs, IL 60558 Phone: (630) 662-0144 Fax: (630) 663-0151 E-mail: - Web: