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Putnam Sale Could Impact its 401(k) Biz: Power Needs Feet on the Street' to Retain, Grow Accounts

The widely reported, but not yet announced, $3.9 billion sale of Putman Investments to Montreal-based Power Corp. could mean the end of a bumpy road for the Boston-based investment firm and its New York-based parent, Marsh & McLennan.

And while it will provide the Canadian company with long-desired access to the large and growing American retirement market, taking over the reins is going to require Power to pay close attention to Putnam's existing 401(k) business.

"Acquisitions or any kind of change, really, lead many plan sponsors to reevaluate their investment decisions," said Chip Roame, managing principal of Tiburon Strategic Advisors, a research and consulting firm outside of San Francisco. "Believe me, every other fund company will be calling Putnam's customers," he said.

But industry experts agree that Putnam's customers will stay put, so long as the new owner highlights the scandal-smeared company's recent recovery and makes an effort to introduce itself in American markets.

"People have already taken pot-shots at Putnam," said Lynn Siewart, founder of Advanced Corporate Planning, a pension and 401(k) consulting company based in Vancouver, Wash. Those 401(k) customers that stayed through the scandal are unlikely to be spooked by new ownership, he said, but it's critical that Power puts in the effort to explain what changes they will-or will not-bring to the company.

"The difficulty with a Canadian firm owning Putnam is that it's pretty much an unknown [company] in the U.S.," Siewart said. "Most brokers doing work in the 401(k) arena are really generalists, so they're going to have to put more feet on the street and be ready, willing and able to work with existing clientele."

Although Power, which is controlled by the Desmarais family, is a relative unknown on this side of the border, back in Canada, the company is famous for owning eight other financial services companies, including the $90 billion IGM Financial, the country's largest mutual-fund distributor and investment advisor, and MacKenzie Financial, which offers over 100 mutual funds and has already begun its entree to the U.S. marketplace.

Power also owns Great-West Lifeco., an insurance company with operations in the U.S., Canada and Europe.

"It's not like they're a Johnny-come-lately," said Roame, who pointed to the company's past acquisitions. "Experience would suggest they bring stability," he said.

Sale of a U.S. mutual fund company to a Canadian firm is not unprecedented, either. Toronto-based SunLife Financial bought-and recently decided not to sell-Boston's MFS Investments. Likewise, Toronto-based Manulife owns John Hancock Financial in Boston.

"Neither one of those deals showed any form of Canada-phobia," said Louis S. Harvey, principal of Boston-based Dalbar, a research and ratings firm that focuses on measuring intangibles, such as customer behavior.

What Power is really buying, Harvey said, is Putnam's 60-plus years of experience in the U.S. In the past, Power has been known to leave existing management in place, and early reports suggest its treatment of Putnam will be no different.

"If Putnam has one strength, it's probably that they have a established a strong relationship with the independent adviser community," said Donald Sowa, of Sowa Financial Group in East Providence, R.I.

For Power, that means immediate access to the $200 billion fund company's existing 401(k) network, a network that Harvey said is positioned to grow quickly, thanks to the Pension Protection Act of 2006 signed last July. Already, the U.S. mutual fund market is 10 times that of Canada's, Harvey noted.

Sowa warned that to not only grow, but capture market share from competitors like Vanguard and Fidelity in the retirement space, Power will have to try to trim the funds' expense ratios. Sowa had hoped Putnam would spin off into its own entity, rather than be purchased by another company, to eliminate one layer of fees, he said.

Still, Putnam is poised for a turnaround, the groundwork for which has already been laid, according to Roame. The new management team, led by Chief Executive Michael Cherkasky of Marsh & McLennan and Putnam Chief Executive Ed Haldeman, has already implemented significant and positive changes, and performance has been strong.

"Cherkasky has a solid reputation and real, meaningful leadership skills," said Bill Bergman, an equity analyst at Chicago-based Morningstar who covers MMC.

Many expect Haldeman to stay at Putnam's helm, which should provide consistency for the firm.

Bergman characterized the sale as "healthy" for MMC, allowing the company to pursue its stated goal of focusing on its "core" businesses, which enjoy better synergies, he said.

Because Power has no existing 401(k) business in the U.S., there are no funds to merge, and layoffs are likely to be minimal.