Dottie Nassaro, a 56-year-old production worker at Coors Brewing Co., is not the sort of customer that mutual funds have historically courted. And Nassaro, a shareholder in the Fidelity Magellan and Asset Manager funds, didn't find these investments by reading personal-finance magazines. Nassaro discovered Fidelity--and Fidelity found her--a few years ago when Coors hired the fund giant to manage money for its 401(k) plan, a tax-deferred retirement program that supplements Coors' regular pension plan.

Through Coors-sponsored seminars and Fidelity worksheets, Nassaro decided that her 401(k) was too conservatively invested. So she upped her contributions, slashed the fixed-income portion in half, and designated 20% to Magellan and 30% to Asset Manager--and until she says otherwise, every dollar that goes into her 401(k) will be invested that way. Nassaro is not alone among her fellow workers: Every month, 23% of Coors' 401(k) money goes straight to Magellan.

CLOCKLIKE. Investors such as Dottie Nassaro are becoming some of the most sought-after customers of the mutual-fund industry. Last year, they pumped about $26 billion into funds, says Avi Nachmany of Strategic Insight Inc., a fund consulting firm. That's about one-third of the funds' net cash flow. This year the inflows could double.

The 401(k) money comes in with clocklike regularity, assuring fund companies a steady source of millions in management fees. Better yet, since these are retirement dollars, they're likely to stay around for years, if not decades. The 401(k) is changing the nature of the fund industry, increasing its ability to absorb market shocks. It's also forcing smaller fund companies to merge to compete for the business.

For millions of workers, the 401(k) is becoming the principal retirement vehicle (BW--July 3). With traditional "defined-benefit" pension plans, companies stop making new investments once the fund has enough to pay benefits. But in "defined-contribution" plans such as the 401(k), the cash keeps rolling in until a participant retires. This money is fueling this year's rally, and it also helped keep stocks from collapsing last year when interest rates soared. Retirement money, says Nachmany, is "increasingly serving as a buffer of stock market volatility."

The 401(k) money is changing the way funds are run. "I don't get wild swings in cash inflows or redemptions," says Stephen R. Petersen, portfolio manager of the $9 billion Fidelity Equity-Income Fund. He estimates that 45% of the assets and 75% of the monthly inflows--which range from $60 million to $100 million--come from retirement plans. That means he doesn't need to keep much cash, since new money will more than meet redemptions.

Mutual-fund companies are getting an ever increasing share of 401(k) money. In 1990, they had some 18% of what was then a $300 billion market. At the end of 1994, they commanded 28% of the $525 billion in 401(k) assets, according to Access Research Inc., a Windsor (Conn.) consulting firm. Employers are turning to fund companies for the same reasons as individual investors. "They have good products, and they do a good marketing job," says Bob Wuelfing, president of Access Research. "For plan sponsors, it's an easy choice." Wuelfing says funds could be managing about one-third of the expected $1.2 trillion in 401(k) assets by 2000 (chart).

MAJOR PLAYERS. It's also a good bet that most of that money will be in the hands of relatively few mutual-fund firms. The Fidelity mutual funds have well over $60 billion in 401(k) assets, representing 5,700 companies and 3.2 million participants. Strategic Insight's Nachmany estimates that last year some 86% of the Magellan Fund's net inflows came from defined-contribution plans.

The big fund companies dominate the 401(k) business. Vanguard Group Inc., the second-largest fund company, has some $42 billion in 401(k) assets, 28% of its total asset base. Other major players include T. Rowe Price, Twentieth Century Mutual Funds, Capital Research, and Putnam Investments. Their growth, in part, comes from investments made years ago in the technology and administrative infrastructure. "If you had less than $20 billion in total assets today, it would be hard to afford to go into this business," says William N. Shiebler, a senior managing director at Putnam.

The 401(k) is leading to consolidation in the fund industry to increase assets and broaden the product line. W. Gordon Snyder, chief marketing executive at Twentieth Century Mutual Funds, notes that his firm, mainly an equity-fund manager, recently merged with Benham Group, a bond-fund manager, to develop fixed-income products for 401(k)s.

It's no coincidence that the fund companies with most of the 401(k) business are those that sell directly to individuals rather than through sales forces. These outfits have long had to communicate with investors without the help of an intermediary--through 24-hour phone lines, educational materials, and newsletters--and that's what's needed to service 401(k) participants. "Employees are retail investors of some sort or another," says Mark Casady, director of defined-contribution services at Scudder, Stevens & Clark Inc.

Indeed, Dottie Nassaro, whose 401(k) investments have done well, has started to put a little money into mutual funds on her own. If others like her do the same, the funds will be getting an extra boost from the 401(k) business.

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