U.S. Bancorp is targeting small and medium-size companies with a low-cost 401(k) retirement plan that spotlights four new mutual funds.

The Portland, Ore., banking company launched its new 401(k) offering this month, following the Securities and Exchange Commission's approval of its plan to create four "funds of funds" - mutual funds that achieve an extra measure of diversification by investing in other mutual funds.

Because they are essentially recycled from existing offerings, funds of funds are considered easy to understand. They are also considered ideally suited for 401(k) plans, because they can simplify investor decisions and ease company sponsors' worries over their participants' selections.

"Plan sponsors of 401(k)s have become concerned that employees of their companies may not be experienced or sophisticated (enough) ... to structure well-balanced diversified portfolios for themselves," said Timothy J. Leach, president of Qualivest Capital Management, U.S. Bancorp's asset management and mutual fund unit.

The $31 billion-asset banking company created the four funds of funds by blending eight of its existing proprietary funds. The funds are named for the common investment styles they seek to match - conservative, balanced, growth, and aggressive.

Defined contribution, or 401(k), plans already account for about 80%, or $1.4 billion, of U.S. Bancorp's mutual fund assets, Mr. Leach said. Until now, few of those assets have come from small companies.

"The average 401(k) plan at the bank has $1.5 million to $2 million in assets," Mr. Leach said.

The high cost of servicing retirement plans for relatively small businesses has discouraged many banks, including U.S. Bancorp., from actively pursuing that customer segment. To overcome that, U.S. Bancorp has outsourced record keeping and plan administration to Bisys Plan Services, a division of the Bisys Group, Little Falls, N.J.

Executives at Bisys, which is also the administrator and distributor for U.S. Bancorp's proprietary Qualivest funds, said the existing relationship with the bank made possible a program that would cost a 100-person plan only a few thousand dollars a year.

"We're low-cost because the client is using automated reporting and there are already existing electronic links between the bank and Bisys," said Eric Hill, vice president for marketing at Bisys Plan Services.

Still, experts question whether margins will be sufficient to support needed training.

"The issue of providing adequate education to participants at that price could be a challenge," said Robert Wuelfing, president of Access Research, a Windsor, Conn., consulting firm.

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