(6 of 7)
The battle for the 401(k) market is expected to get nasty. "The competition is incredible right now. Incredible!" says Christopher Zyda, director of investments for the Walt Disney Co., who oversees $1.3 billion in 401(k) money for its employees. "We've looked at some of Fidelity's key competitors and realized that the fee structure has decreased significantly. As a result, we were able to negotiate a much better fee structure with Fidelity."
The 401(k) sponsors have a tremendous influence on the way Fidelity manages its portfolios. Those managers are reported to have been prime instigators of the changes that Fidelity made last March. Although Fidelity tries to downplay such corporate pressure, Vanderheiden acknowledges that it was "one of the top three of four" reasons for the moves.
The 401(k) sponsors are also gatekeepers to Fidelity's expansion plans. Johnson is, in the words of an associate, "a sucker for a good idea," and Fidelity's hottest one is to leverage its massive technology infrastructure. Since Fidelity is already handling record keeping for pension plans, the reasoning goes, why not take on other corporate bureaucracies, notably benefits plans, payroll and human resources? In today's penny-pinching corporate environment, these areas are "non-value adding." In other words, they cost money, so why not bid the work out?
This strategy is an extension of Johnson's obsessions with technology and service. Besides, as Johnson says, "the history of equities is highly cyclical. Processing you do every day." Paul Hondros, who headed Fidelity's institutional-services division until taking charge of the retail business last week, puts it more emphatically: "The future is not about Magellan, despite all the press coverage. Markets come and go. This is a big diversification play. The future is technology-based service." Such service complements the investment business as more than just a hedge, though. By tracking all that data, Fidelity would gather information on the financial conditions and habits of a huge number of potential clients for its financial services. It would turn around and make customers of them while they are working and then hope to manage their money when they retire.
Johnson is also driving the company well beyond the U.S. In Japan trillions of yen have been figuratively kept under the mattress, locked into low-interest savings accounts. That money is becoming unlocked--and Fidelity wants a piece. In December, Fidelity became the first U.S. company to launch a yen-dominated investment trust in Japan. In Britain defined-contribution plans similar to 401(k)s, as well as mutual funds, are just beginning to take off, and the company is investing heavily.
No one doubts that with its talent, dominant share of the 401(k) business and investment in technology, Fidelity can remain the industry leader for the foreseeable future. But with greater price competition, the constraints on individual genius and the burdens of size, there may be fewer opportunities for Lynch-like glory.