The 401(k) plan system is under siege, both in the media and in Washington. Seemingly each week there is a new revelation about another company's 401(k) plan gone bad: first Enron, then K-mart, and now Global Crossing.

Yet, for most fund firms the steady diet of bad news appears to be somebody else's problem. To date, these controversies have concerned administrative issues such as fiduciary responsibility, company stock, and blackout periods when the plan is changing from one vendor to another. They do not involve funds.

There are now more than 500 fund complexes. Yet, the 401(k) industry is dominated by roughly 50 administrators. So, yes, most fund firm's are not directly in the 401(k) business, they are a partner to it. Simply put, 401(k) plans are a large -- and, admittedly, complex -- distribution channel for mutual funds.

What then, does the Enron controversy have to do with a mutual fund company's bottom line? Quite a lot actually.

The following companies are involved in lawsuits related to 401(k) plan matters:

New York Life,
Lucent,
Enron,
Nationwide,
Arthur Andersen,
and Northern Trust.

Look for that list to grow.

Ok, again, so what? These court battles revolve around, for the most part, plan administration and design issues, namely blackouts and company stock. They do not involve asset managers or mutual funds in and of themselves. Mutual funds are the less risky, safer investment when compared with employer stock.

In the golden old days of the 1990's, 401(k) plans were seemingly invincible. Overall assets were growing by leaps and bounds, there were books with titles like How to Become a 401(k) Millionaire, and Congress was looking for ways to increase the amount of capital participants could invest in their plans.

With the new millenium, though, the story is much different. The tarnish is off the plans. There is even the risk that the tarnish spreads to fund firms not involved with 401(k) administration directly.

Investors do not think about 401(k) plans as component parts. They do not differentiate between the administrator and the asset manager. The debate that has capture the attention of Main Street and Capitol Hill is 401(k) plans period.

Still think this has nothing to do with mutual funds?

There is a lot that can happen during the remainder of this legislative session that could adversely affect a mutual fund firm's business. In its crusade to do something about company stock, Congress could conceivably enact laws that cap the amount a participant can invest in any one investment option in a 401(k) plan. Now, this will not be so dreadful for firms that have bundled contracts with a sponsor. But where a sponsor has an unbundled plan, a popular fund might not be able garner all the assets it potentially could and lose out to other funds from other companies.

Congress and the White House -- remember, President Bush has assigned a task force of the Secretaries of Treasury, Commerce, and Labor to investigate -- could enact any number of regulations that make it harder for funds to be included in plans, for participants to invest in those plans (or in the amounts they used to), or for funds that are going through a volatile patch to remain a part of a plan offering.

And that's not even counting the response from the public. We all understand the differences between investing in company stock and mutual funds. Participants in 401(k) plans do not have that same understanding just as everyone involved with this article -- writer and readers alike -- do not have an understanding of building jet engines or performing surgery.

The images in the news of tearful Enron workers losing their entire retirement nest eggs because of what happened in the company's 401(k) plan have been and continue to be very powerful. The idea that is getting reinforced is this: 401(k) plans are not safe! The public is not necessarily making distinctions between company stock and mutual funds.

So, a mutual fund can be included as an investment option in every 401(k) plan in the nation, but what good does that do if no one will invest in it? If workers come to believe that 401(k) plans are basically unsafe, they simply won't invest. They'll vote with their wallets.

Mutual funds have a lot of work to do and calls for more education are not going to cut it. Mutual fund firms are going to have to get aggressive. This could mean lobbying efforts in Congress to explain how mutual fund investments differ from company stock investments in 401(k) plans. They could even propose -- as Vanguard has -- that sponsors create two distinct defined contribution plans: one for company stock only and one for all the other investment options.

There is further need for an aggressive marketing blitz through mainstream channels to increase the individual investor's awareness of the benefits of a mutual fund investing. Keep in mind, even though the sponsor company purchases the 401(k) plan, the real customer is the individual investor. If mutual fund firms want to preserve this important distribution channel, then they are going to have to act quickly.

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