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Principal sees value of Web in 401(k) market


The Principal Financial Group believes that some of the best uses for the Internet will be for the 401(k) market and that it benefits plan sponsors as well as plan participants.

Over the past three months, Principal has moved 750 of its plan sponsors over to Direct Connect, an Internet-based defined contribution reporting system. The program allows plan sponsors to report participant data and contributions via the Internet, which company officials say is quicker and simpler than sending the information by computer disk or modem.

Dan Houston, vice president in pension services for Principal, said the company will eventually move all its customers to Internet reporting.

But Principal also believes that the Internet is making life easier for plan participants as well. Like many other companies, Principal provides online access to participants' 401(k) accounts. Plan participants can get information about their 401(k) accounts and make transactions through the Principal Retirement Service Center site. Plan participants can check their account balances, review performance, project their future earnings, apply for loans and change their allocation of contributions.

The Internet will never replace the telephone as a means of managing 401(k) accounts and queries but it certainly helps reduce telephone traffic, Houston said. He estimates that only five percent of those who use the company's voice response system to manage their 401(k) accounts need to eventually talk to a live operator. That may be just the traffic the Internet can handle.

"(The telephone) still does a lot of the heavy lifting," Houston said.

Houston does say, however, that Internet access and the freedom it provides may also drive up plan costs because participants will move their money around more given the opportunity.

David Wray, president of the Profit Sharing/401(k) Council of America, says that so few people have online access to their 401(k) plans that it is difficult to predict if people will trade too much when given online access.

He estimates that less than five percent of plan participants currently have online access to their plans. However, he says that when transactions became easier in the late 90s as voice automated systems became standard, trading did not increase significantly. In fact, employees still tend to be too passive when it comes to their plans, he said.

"The problem with the system is that employees don't change (their accounts) enough," Wray said.

But, there is a small percentage of people - less than five percent - that make too many changes to their 401(k) accounts and drive up costs, he says. He predicts that the Internet will allow this small group to do even more trading, causing some in the industry to consider limits on transactions or even penalties.

Online brokerages gaining ground

Many online brokerage firms like Discover Brokerage and E*Trade have introduced their own mutual funds within the last few months in an attempt to grab more assets and bolster their name among more established financial services firms and mutual fund companies.

A recent article posted on the Gomez Advisors website (www.gomez.com) cites the soaring stock prices of online brokerages like Charles Schwab and E*Trade as evidence of the surging popularity of online investing. Gomez publishes a quarterly ranking of online brokerages on its website and also posts a primer about mutual funds and online mutual fund resources.

The article, entitled "Online Brokers Earn Market Respect" and written by Julio Gomez, Gomez' founder and principal, focuses on how the stock price and market capitalization of online brokerages has grown much more quickly in 1998 than traditional brokerages. The story notes that the stock prices of E*Trade and Schwab more than doubled over the past year, while Merrill Lynch's stock only grew .2 percent, and A.G. Edwards lost 5.8 percent.

Alan Alper, editorial director of Gomez Wire, an online news and research publication of Gomez Advisors, said that the piece was written to demonstrate just how important online trading has become, to call attention to the fact that the traditional brokerages have "tiptoed into online investing" and to point out that the market has reacted to this reluctance.

Greg Gable, a spokesperson for Charles Schwab, says Schwab's stock market success is not only attributable to the company's willingness to harness the Internet but also to its development of other infrastructure such as telephone support and branch offices.

"There's no doubt that online investing is a highly important phenomenon that is changing the industry," Gable said. "We've believed for a number of years that this is the wave of the future." But, he said that the Internet is only "one piece of the puzzle."