California has begun offering a 401(k) plan to businesses with as few as five employees. Although few doubt the potential market for the tax-deferred retirement savings plans at tiny companies, finding a profitable way to support these customers has proved elusive. "The small end is really untapped because of the difficulty in servicing it at a cost-effective price," said Laima Kardokas, senior vice president for trust and investment management at the Bank of California, San Francisco. In 1994, only 11% of the U.S. companies with five to 49 workers and a quarter of those with 50 to 99 employees offered 401(k) plans, according to data compiled by Access Research, Windsor, Conn. By contrast, 63% of firms with 500 to 1,000 employees provided 401(k) plans. The Bank of California is counting on a streamlined package to fulfill small businesses' needs without overwhelming their owners with superfluous choices. The strategy is also calculated to contain the bank's costs. Its small-business 401(k) plan limits investment options to nine of the bank's proprietary HighMark mutual funds. Record-keeping, regulatory reporting, and administrative services are being outsourced to Bisys Plan Services, a Philadelphia unit of Bisys Group, Little Falls, N.J. The bank already provides a customizable 401(k) plan to larger companies. It includes a wider selection of mutual funds, including Fidelity and Franklin Templeton offerings, and such specialized services as Spanish-language telephone support or company stock as an investment choice. The small-business package, targeted for companies with fewer than 50 workers, relies on a prototype plan tested to fulfill legal requirements. Though simplified, the package still supports daily investment switches and quarterly account statements, as well as toll-free telephone support. But even a spartan 401(k) plan may be too costly or complicated for a significant segment of the target market, cautioned one expert. "Many small companies don't need a 401(k) plan," said Robert Wuelfing, president of Access Research. Firms with fewer than 40 participants may be better off with profit- sharing or enhanced individual retirement account plans, he said. In any case, Ms. Kardokas said the Bank of California doesn't expect the small-business product to be an overnight success. For the bank, she said, the real gains are to be made in cementing ties with its small and medium-size business clients and cultivating increased advisory-fee income. "We're interested in growing assets under management," Ms. Kardokas said. "And we'll make money on the mutual funds and consolidating the bank relationship with the client." That makes sense to some experts, provided the bank adequately invests in distributing the product. "If you put the sales support structure there and you pay them well, you can succeed in garnering assets," said David Master, consultant with the Optima Group, Fairfield, Conn. As some banks enter the market, however, insurance companies and brokers are stepping up their efforts in the expanding niche. "Major players, such as Schwab, will make a move in this market soon, and that may force companies to offer nonproprietary funds, too," Mr. Master said. Next year, Bank of California plans to merge with neighboring Union Bank, San Francisco, which sponsors the Stepstone proprietary mutual funds. Details of the merger remain to be decided, Ms. Kardokas said. "But we anticipate this product will be very interesting for the combined bank."

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