Des Moines-based insurance and financial services company offers workers Web tools for managing their assets and uses database marketing to effectively package products.

The Principal Financial Group, which manages $206 billion in retirement savings, investments, and insurance for 15 million employees of 100,000 small and medium-sized companies, has a proven track record of holding onto workers' funds as they move through their careers. Principal does it by offering workers easy-to-use Web tools for managing their money and by employing sophisticated database marketing to package its products in compelling ways. By wiring its 1,015 benefits counselors into the latest marketing data, and by making it easy for an employee at a client company to log on to one account to view his or her entire portfolio of assets, Principal delivers personalized investment advice and customer service to a fragmented customer base--key to increasing assets under management and retaining those assets after workers retire. "It's very much a scale business," says Dafina Dunmore, a stock analyst at Morningstar. "The better the technology, the more the employers are interested in utilizing that company."

By packaging money management and the administrative work of managing retirement funds, Principal takes the burden off smaller companies and charges higher prices for more complete service. By pairing the use of sophisticated business intelligence tools with the ability to keep IT costs from spiraling out of control amid surging demand for services, Principal Financial Group earned the No. 1 spot in InformationWeek's annual survey of the 500 U.S. companies that make the best use of business technology. "Our main purpose for IT is helping Principal grow," CIO Gary Scholten says. "But the mantra we have is to help it grow responsibly."

And Principal has been growing. Revenue last year rose 8.5%, to $9 billion, and profits were up 9%, to $901.3 million. In 2004, net income increased 11%. IT spending is budgeted at 4% of revenue this year and should rise a bit next year.

Customer Lock-In

Principal's ability to keep managing customers' money even after they retire has helped fuel that growth. The company retains 54% of assets that become "at risk" when a worker retires or changes jobs, a rate that's among the best in the industry. Technology is key to that effort.

The company excels at building Web technology that lets workers view all their accounts in one place. And it furnishes sales reps with Web tools that let them go online during sit-down meetings with employees to view their investment status. Often, those meetings happen in low-tech environments such as small offices and factory floors. The idea is to keep the meetings to a half hour or less. "We're actually competing with the employer for productive work time," says Doug Fick, a divisional CIO. One IT initiative uses VPN technology from iPass to give benefits advisers access to the Web from hard-to-connect locations.

"They're working feverishly on their Web presence," says Tom Moore, an enterprise account manager at Hewlett-Packard, who heads sales to Principal in Des Moines, where the financial services company is headquartered. "If you're easier to do business with, you tend not only to get more customers, but also keep them."

Pushing more data to sales reps and customers is a key element of Principal's fast-growing portfolio of on-site services, known as Worksite, which in turn helps generate data to market future products. "This is one of those invest-for-the-future things," Scholten says.

Principal has devised ways to pull information on assets from a variety of internal and external databases, then apply calculations that give workers a personalized picture of their retirement outlook, on the Web and in monthly statements. It's a powerful marketing tool. Sales of Principal's Total Retirement Suite of products, which combines 401(k)s with additional benefits such as excess contributions, profit sharing, and stock ownership, doubled last year. Many companies use Total Retirement Suite to help retain top managers.

By collecting gobs of high-quality data about the demographics, life milestones, and benefits-enrollment habits of the 15 million workers it covers, Principal is able to sell them retirement plans, then tack on sales of additional products such as mutual funds and insurance. It's also rolling out health insurance and retirement products to increase the assets it manages. Database analysis techniques have helped the company craft products that combine retirement plans with fast-growing vision, dental, disability, and life insurance.

Since Principal targets companies with 100 to 1,000 employees, it often uses IT to market funds with returns based on life events--a strategy used in selling to less-savvy investors--and to automate much of the administrative work that can add expenses. The company's "milestones" products reallocate workers' money among funds as they get close to retiring or sending kids to college, reducing the need for more hands-on investing. "It's not designed for the wealthy. It's designed for the rank and file," says Susie Thomann, a VP and divisional CIO. "The rich have people beating down their doors to help them manage their money."

Marketing so-called "lifetime funds" to baby boomers is the focus of a deal Principal struck in July with Washington Mutual, which will combine Principal's $28 billion mutual funds business with WM Advisors' $26.4 billion in assets under management. The acquisition is expected to close in the fourth quarter.

Principal also is combining its health insurance, mutual fund, and online banking businesses to offer new health savings accounts, which went on sale this summer. The accounts let employees set aside money on a pretax basis for medical care, without the use-it-or-lose-it restrictions of conventional flexible spending accounts. They're partly enabled by integrating Principal's database with employers' payroll systems and letting customers access the accounts over the Web. As the assets build up, Principal will be able to market bonds, mutual funds, and other products to customers who have purchased health savings accounts, providing higher-return alternatives for their money, says Todd Sutphen, a client executive at IBM who's in charge of sales to Principal. IBM helped Principal design the process that underpins the health savings accounts. "They're at the front edge of this," Sutphen says. IBM supplies mainframe and RISC-based Unix systems to Principal, whose main database of customer information runs on IBM's DB2 software.

Automation Edge

Another IT strength is Principal's ability to automate database transactions to lower selling costs and improve service. Selling to and servicing 100,000 small and midsize companies means IT needs to program for fast response times and high transaction volumes. Scholten estimates the company performs 1 million online transactions each day, and 98% of cash contributions--direct from workers' paychecks--are handled over the Internet.

Scholten, 48, started at the company as a Cobol and assembly language programmer out of the University of Northern Iowa. Even then, the company had a reputation for being technically advanced--it used terminals instead of punch cards. "I would guess there are still a few programs with my name on them" on the company's mainframes, he says. During his career at Principal, Scholten has headed technology for nearly every business unit, becoming CIO of the company in 2002. A distance runner who still laces up almost daily, he competed regularly until about two years ago. Now, he runs a few 5K races a year in addition to his workouts.

Despite being a native Hawkeye, Scholten has little taste for Midwest delicacies such as corn dogs and pork-chops-on-a-stick. These days, it's more like curry and samosa: Scholten has been traveling every few months to India, where Principal is expanding; he plans to make his seventh trip this fall.

Principal's international business grew nearly 17% last year, to $604.5 million in revenue, including mutual fund and insurance businesses in India, a longtime presence in Hong Kong, a recent Chinese mutual fund joint venture with China Construction Bank, and operations in Brazil, Chile, and Mexico. Principal managed $6.7 billion in assets outside the United States at the end of last year. In India, it recently opened an office in Pune to complement its Mumbai office. Principal outsources some IT development to Tata Consultancy Services and has hired 50 of its own workers in India. Scholten predicts a large market for retirement benefits in India once regulations ease.

Still, Principal can't take anything for granted. Competitors such as Fidelity Investments, the No. 1 401(k) provider, are moving down into Principal's small- and midsize-business market, just as Principal is moving up to serve larger customers, including the National Geographic Society, Igloo Products, and Montefiore Medical Center in New York.

Principal is a step ahead as one of just a handful of companies that have automated collection of reams of data about employees' age, marital and family status, salary, and benefits. Small companies often store that data in Excel spreadsheets, Intuit QuickBooks files, or on paper, says Todd Eyler, an insurance industry analyst at Gartner. Connecting to customers' payroll and HR systems instead of swapping e-mailed files, faxes, and snail mail provides Principal a big cost advantage, as more insurers reach into the midmarket. "As companies try to grow where the economy's growing, they're looking for a much more transactional approach," Eyler says. "That's a huge technology challenge."

It's one that Principal thinks it has mastered. "Lots of companies are seeing the potential in small and midsize business," Scholten says. "It's an underserved market. We think we have the right technology to serve it."

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By Aaron Ricadela

Copyright © 2006 CMP Media LLC