CHICAGO - Banks contemplating the competitive 401(k) market must consider whether to tackle the business at all before debating the merits of in-house versus outside programs.

That was the consensus of four panelists discussing 401(k) plans at a National Investment Company Service Association conference here.

"Many banks are trying to get into the 401(k) market and view it as a new adventure for the bank, but that's really the wrong way to look at it," said Kenneth Hoffman, president of the Optima Group Inc., Milford, Conn.

Instead, banks should see the 401(k) field as a developed market that is very difficult to crack, Mr. Hoffman said.

With most market segments already served, banks must identify the special qualities that they can bring to the marketplace, he said.

A Takeover Business

Noting that the ways people save and invest have changed, Joseph T. Chadwick, principal of Robert Mercer Inc., a Baltimore consulting company, said banks must have a wide variety of daily priced products and statements that combine accounts to win in the marketplace.

Except for growth potential in the small business segment of the market, "It's a takeover business," Mr. Hoffman added.

In an aside on retirement plans, Mr. Hoffman said the change from no plans to company plans to 401(k)s could be simply described as: "We don't care, we care and care for yourself."

Defense or Offense?

There are two strategies for banks in the 401(k) business: defensive and offensive, Mr. Hoffman said.

In the defensive system, profitability isn't the key factor.

Rather, the bank may offer plans simply to keep more of a customer's business under its roof, he said.

Because profitability may prove marginal in defensive programs, it's often prudent to hire an outside company to handle the business, he added.

Larger banks may offer an offensive program - one geared toward maximum revenues.

But, he warned, it typically takes three to five years to see a return on an investment in the business.

Loans Versus Investment

Another initial obstacle is that banks have organizational structures designed for loans, not investment products, the panelists said.

"I think bank structures and offering investment products are totally conflicting," Mr. Hoffman declared. "It will only change when banks give up the spread focus."

Another problem is dealing with commercial call officers who are loathe to recommend bank 401(k)s to their customers. The problem, stems from the late 1980s when bankers botched initial forays into the business, causing problems for their commercial brethren, Mr. Hoffman said.

The Groundwork

That complaint struck a chord with Paul W. Fulmer, investment executive at First National Bank of Maryland, who is setting up a 401(k) program for small businesses. "One of the major obstacles I faced was the lack of interest by commercial officer$," he said. "They really had a bad taste in their mouth (about the program)."

It's essential to prove to commercial officers that "we will not damage your lending relations," Mr. Hoffman said.

But the bank developing 401(k) products must lay solid groundwark before approaching those officers.

One key decisions is whether to hire an outside company or have the bank tackle the program.

"Your bank has to have a very strong commercial orientation to be successful; if not, we'd recommend a third party," Mr. Hoffman said.

Keeping in Touch

When using an outside company, it is important not to lose control, the panelists said.

It can get away from you if you plot out the program and just let it run," said Trip Hardy, of Trust Consultants Inc., Chicago.

Mr. Hardy recommended that banks generate standards, clearly define the roles of each party and then maintain communication between all parties. That's been the key to TCI's successful relationships with banks, he said.

Even though an outside company may be running the program, it's important for the bank to keep in touch with customers, Mr. Fulmer added.

First, he said, the bank should receive customer reports from the outside company, then call customers to discuss their accounts and their satisfaction with the outside vendor.

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