Mutual fund vendors with a new Internet site can score a marketing edge with defined contribution fund sponsors even though only a small percentage of participants are believed to be online, according to pension consultants.
Fidelity Investments, Boston, which has more than $70 billion in defined contribution assets under management, was the first to establish a World Wide Web site in February. Fidelity's home page is http: www.fid-inv.com.
The Teachers Insurance and Annuity Association - College Retirement Equities Fund followed Fidelity March 1 by establishing an Internet gopher site (gopher.tiaa-cref.org).
Other mutual fund vendors - Putnam Investments, Boston; T. Rowe Price Associates, Baltimore; Vanguard Group Inc., Valley Forge, Pa.; Merrill Lynch, Plainsboro, N.J.; and John Hancock Funds, Boston - are considering going on the Internet or are exploring opportunities there.
Although Internet connections for mutual funds may be aimed generally at retail clients, the expected interest of plan sponsors comes from their desire for improved communication with participants, according to consultants. And the Internet has become a buzzword for communication.
Some defined contribution consultants and mutual fund executives think Fidelity made a smart move because it will help the firm, already a powerhouse in the defined contribution area, get more defined contribution business.
Plan sponsors now question prospective fund providers about their ability to communicate with participants, said Gary Blank, a consultant with Retirement Plan Consulting, San Francisco. Fidelity executives can point to their Internet site and say they are on the cutting edge in communication, said Mr. Blank.
"It certainly enhances your position if you (have an Internet site) and somebody else doesn't," said Jeffrey Close, director of communications with Access Research Inc., Windsor, Conn., a defined contribution consultant.
Mutual fund vendors on the Internet also can say they are communicating with participants at every level, said Mr. Blank.
"The Internet has a lot of marketing cachet right now," said David Nadif, a research marketing analyst with Wells Fargo Bank, San Francisco, and a frequent Internet user.
Yet, despite the marketing impact, the vast majority of DC plan participants probably won't be connecting to mutual fund companies through the Internet for now. Mutual fund company executives and pension consultants say the vast majority of participants might not be connected for at least two years. However, mutual fund Internet connections will please technologically sophisticated retail customers now.
Participants in the 401(k) market are in a broader spectrum of people, often technologically less sophisticated and generally reluctant to make decisions about their investments. Exceptions, of course, would be participants of DC plans sponsored by Apple Computer Inc., Cupertino, Calif., and IBM Corp., Armonk, N.Y., or groups of employees like airline pilots who generally would be sophisticated users of technology.
Technological sophistication is important in figuring out how to access the Internet, a more complicated connection than online services like Prodigy and American Online, which have limited Internet connections.
Mutual fund companies often find it a struggle to get participants in 401(k) plans to "read something or watch a video. If they won't read (a brochure, prospectus or other information on paper) it is expecting a lot of them to dial in (to the Internet) to read something," said Steve Novitz, a spokesman for T. Rowe Price. Mr. Novitz's views were echoed by other mutual fund representatives.
The hard-to-reach Internet connection for typical DC participants may seem surprising. The Internet is the main electronic artery in the information superhighway. And the Internet is a sexy concept in business today.
Both Fidelity's and TIAA-CREF's Internet sites offer only information about their products; transactions and exchanges among funds are not allowed. TIAA-CREF's Internet site can be accessed through Prodigy and American Online.
Internet proponents claim the worldwide network has 20 million participants and is growing at a phenomenal pace. But some mutual fund representatives point out that figure is a worldwide number, not just people in the United States.
"It takes a fair amount of equipment, a fair amount of (technological) savvy" to use the Internet, said, Mr. Nadif. He said even with a fast 14.4K baud modem, connecting to the graphical Web sites seems slow.
Mutual fund executives and pension consultants described other reasons the Internet might not be the right connection for defined contribution plan members:
Connecting to the Internet isn't simple;
Using reference books for research is faster when making mutual fund comparisons;
Early Internet sites for mutual funds will be aimed at marketing to retail customers; and
DC plan participants are comfortable with voice-response systems to contact mutual funds.
"Most participants have not shown a significant interest in software for retirement planning or those sorts of things," said Mr. Close.
Online sites for mutual fund companies now have "some educational content, but the clear path in each of them is to order a prospectus," said John Heywood, an electronic client agenda champion at Vanguard who is heading the firm's efforts to move to American Online.
Marketing that is useful to retail clients isn't as helpful for plan participants because they can only select from funds their companies offer.
One group of technologically sophisticated DC participants is the members of TIAA-CREF. Original users of the Internet were academics who communicated on research projects with the Pentagon and federal government agencies. Colleges and universities generally offer Internet connections for free, and academics are comfortable with accessing electronic research databases.
Before TIAA-CREF went on the Internet, some university employees made complaints like, "'My God, why aren't you on the Net?'" said Jim Harkness, a second vice president at TIAA-CREF. He led TIAA-CREF's Internet project.
Initially TIAA-CREF's Internet connection will include descriptions of the company's products and services, daily unit values and performance data on its CREF accounts and current interest rates and performance data on TIAA.
Fidelity's Web site includes information on Fidelity's mutual funds and brokerage offerings, investment tools such as an asset allocation worksheet and college savings planning calculator, and details about Fidelity events and seminars.
Although Internet access can be difficult to obtain now, Mr. Harkness believes access will become much simpler when Microsoft Windows95 arrives later this year. Expense is another concern: Internet connections can cost more initially than commercial online services depending on use, although accessing the Internet through online services also could add up.
So many mutual fund families are thinking about having Internet sites because they don't want to get behind the technological curve and want time to determine how to use the Internet effectively.
"Everybody is afraid not to be there (on the Internet), but they aren't sure what to offer, or how it benefits them in reaching the consumer," said Christine Noonan, who does marketing research for group internal projects with the consulting firm Frank Russell Co., Tacoma, Wash. She recently completed a survey on how the Internet is used among money managers, custodians, consultants and others in the institutional market place.
Because of security concerns, the Internet isn't much used now by trust and custodial operations. One technology expert with a custodial bank said he doesn't talk to the media about security concerns because he fears he could be targeted by computer hackers.
As a loose confederation of linkages, the Internet is considered vulnerable to computer hackers, although consultants think brokers and dealers eventually will solve the security problems, and some day orders and trades will be done through the network.
However, the experts are hazy about just how far into the that will happen.