CHICAGO - First Chicago Corp., a behemoth in Midwest corporate banking, has achieved only nominal success in the 401(k) world. But it has high hopes for a giant step forward by teaming up with Boston-based Putnam Investments, the nation's sixth-largest mutual fund company.
First Chicago, the country's 10th-largest banking company with $64.1 billion of assets, is counting on its relationships with nearly 10,000 large and midsize companies to which it can cross-sell its 401(k) plan.
"First Chicago has a significant franchise in the corporate market, and 401(k) plans are products that every one of these companies ought to have," said David Kling, managing director, retirement services.
By offering 401(k) plans to its corporate banking clients, First Chicago gains another distribution channel for its 14 Prairie Funds beyond its retail branches and trust division.
But the bank's corporate-banking stature isn't enough to make it a major player in the 401(k) arena. So, after dabbling in the 401(k) arena for a year it teamed up with Putnam about eight months ago, .
Even though the assets in the Prairie Funds have been growing rapidly, at $3 billion under management they are overshadowed by more established behemoths such as Putnam.
The Prairie Funds are scarcely recognized by most investors, Mr. Kling acknowledged. That makes promoting a 401(k) plan difficult in a market already crowded with mutual fund companies, pension consultants, and brokerage firms - not to mention other banks.
So First Chicago has added Putnam's portfolios alongside its own as part of its 401(k) package.
Since the two companies entered their partnership, they have captured 200 clients and generated $100 million in 401(k) assets under management, Mr. Kling said.
First Chicago began focusing on the 401(k) field last January when it launched a money-management subsidiary, First Chicago Investment Management Co.
"We've reached the point where we've got some significant momentum," Mr. Kling said.
For First Chicago, Putnam's brand name boosts the credibility of its 401(K) plan. Putnam's fund family manages $75.9 billion in assets.
"If our fund family had brand-name recognition and as long a track record as Putnam, we wouldn't need Putnam to be attractive in this marketplace," Mr. Kling said.
But such an arrangement can be a double-edged sword. Some investors might resent having only the mutual funds of two companies to choose from, said Ron Bush, vice president of Access Research, a Windsor, Conn., firm that monitors the 401(k) business.
"The selection of multiple-fund families means greater diversification," he said.
On the other hand, Prairie Funds get more attention if they onhave only one other fund family to compete with for assets, Mr. Kling commented.
"Sometimes people pick only Prairie funds, and sometimes they pick only Putnam funds, but we still get compensated as a distributor of Putnam's funds," Mr. Kling said.
In addition to helping on the fund side, Putnam has agreed to perform complex record-keeping duties for First Chicago's larger corporate clients, Mr. Kling said. Bisys Inc., a Little Falls, N.J., technology company, is keeping the records for companies with fewer than 500 employees.
Record keeping, the least sexy part of the 401(k) business, is just as important to a company executive and employees as the performance of the funds in the plan.
Putnam and Bisys offer clients daily pricing and account valuation, quarterly statements, and a toll-free telephone line that enables individual plan participants to access their account balances, process transactions, and ask a sales representative questions.
The companies also prepare tax forms and make sure each 401(k) plan conforms to the litany of related government compliance regulations.
Mr. Kling said sloppy record keeping was the most common reason companies changed their 401(k) providers. He said as many as 15% of companies with 401(k) plans changed providers every year.
That's why First Chicago placed an advertisement in the Chicago editions of The Wall Street Journal, with the headline, "Why we think your company's 401(k) plan might be ready for early retirement."
Indeed, First Chicago used to rely on SEI Corp. for record keeping, but the Wayne, Pa.-based mutual fund company has since pulled out of the business because it got so complicated.
"The 401(k) business is very technology driven," said Lou Tasiopoulos, director of Putnam's financial institutions division. He added that "Putnam has the economies of scale that a bank doesn't to perform these services."
Mr. Tasiopoulos said Putnam was discussing similar relationships with other banks, though he would not say which or how many.
"We are making long-term bets banks will become one of the largest distributors of mutual funds through 401(k) plans," Mr. Tasiopoulos said. "If we didn't help them do that, somebody else would."
Snaring 401(k) business has become an important part of First Chicago's overall strategy to gather assets into its own mutual funds.
Mr. Kling added that Prairie Funds had captured about 50% of investor's money going into the 401(k) plan.
First Chicago sees a huge growth opportunity, especially because it stands to gain a myriad of small-business clients through its pending merger with NBD Bancorp, Detroit.
The merger will create a $120 billion-asset entity with more than 700 branches.
J. Stephen Baine, president of First Chicago Investment Management Co., said that "401(k) will be our most important distribution channel because, through the merger, one-third of the small businesses in Illinois, Michigan and Indiana will be doing business with us.'