While pension lawyers wonder whether the outcome of a legal battle between First Union Corp. and participants in its 401(k) plan could alter the way financial services firms run their own employee retirement programs, service providers say they are not worried.
Although the Vanguard Group's own 401(k) plan only offers Vanguard funds, company executives are not concerned that their plan would flunk the "smell test," said John Demming, Vanguard spokesman.
For one thing, Vanguard provides all of the funds in its 401(k) plan "at cost," Mr. Demming said. For example, employees who select Vanguard's Standard & Poor's 500 portfolio are charged 18 basis points, compared with Vanguard's average of 28 basis points and the industry average of 145 basis points, he said.
"We have a diverse mix of active and passive portfolios offered at low cost," said Mr. Demming. Vanguard's 401(k) plan offers 23 investment options. Of these are 12 equity funds -- six actively and six passively managed, four balanced funds, five bond funds, a money market fund and a GIC fund.
And with the exception of the bond and money market portfolios, most of the actively managed portfolios in the plan are run by external investment managers, Mr. Demming added.
Moreover, all of the costs associated with the plan are fully disclosed to participants, he said.
Executives who run Merrill Lynch & Co.'s $6 billion profit-sharing, 401(k) and employee stock option plans say they are not worried about the First Union lawsuit.
About six of the 64 investment options offered to participants in Merrill Lynch's defined contribution plans are from outside funds, said Kenneth Reifert, director of global benefits at Merrill Lynch. These outside funds have attracted less than 6% of the assets in the plan, he said.
All of the funds, including the proprietary ones, are selected after in-depth research and analysis and are monitored, said Denise Kleis, vice president in global benefits. Each of the funds has to be in the top quartile in three of the past five years, measure up to certain volatility standards, be consistently above average and be invested according to the stated fund goals, she added.
Merrill Lynch pension executives have carved this plentiful array of investment options into two categories consisting of seven core choices and the remaining non-core options, Ms. Kleis explained.
The core investments are designed so a participant's portfolio is diversified if he or she selects more than one, she said. More sophisticated investors can choose their own menu of options using the non-core choices, she added. And while the management fees are built into the net asset value, all of the investment options are offered to employees as no-load funds.
Next month, Merrill Lynch will begin providing Internet access to participants so they can make plan changes online, he said.
But the firm, which was the first to partner with an independent advice provider -- Financial Engines Inc., Palo Alto, Calif. -- is not yet providing that service to its own employees.
"We educate people so they can make informed decisions but do not say they should be in this fund or that fund," Mr. Reifert said. "It is one of those things we want to guide without incurring the risk. We do not want to cross that line (investment advice) before we get some sort of relief from the Department of Labor."