The selection of a service provider for a 401(k) plan is a daunting task. There are about 5,700 companies that offer some level of 401(k) plan services. Of these, about 500 are national vendors, and of these, about 200 are main players with name recognition.

Furthermore, different providers have strengths in different areas. For example, some providers can handle employer stock as an investment and others cannot; some offer access to self-directed brokerage accounts and others do not.

"The quest is to find which companies are interested in a plan sponsor's business, and which have the products and services to meet the plan sponsor's needs," said Don Lanman, senior vice president for marketing and commerce at 401kExchange, which offers Web-based 401(k) service provider ratings and plan proposal, analysis, and due diligence services.

A small business financial adviser may need to review 401(k) provider options periodically -- the client may be dissatisfied with the level of service, a merger or acquisition may result in the combining of two plans different vendors or servicing platforms, or an existing contract may be expiring.

In addition, "in the defined contribution world, things can change dramatically about every 12-18 months," with new entrants coming to the market, providers folding and merging, and new product offerings, said Lori Shapiro, a principal with William M. Mercer.

Search Basics

"Every search is unique to every plan sponsor, based on business needs, retirement plan needs, and the like," Shapiro said. Two organizations with the exact same asset base and employee demographics may have two different sets of objectives. "Having said that, typically plan sponsors are seeking a cost-effective solution, both from an administrative and from an investment management perspective. This doesn't mean the cheapest offering; it means getting the best value," she said.

Any adviser, especially to midsize and small business, should consider using the services of a retirement specialist or professional benefits consultant when conducting a plan provider search.

"You need a person in the quarterback or lead position to make sure that all the parties involved are doing their jobs, said Eric Schneeman, president of Search401k, an online product comparison, proposal request, and proposal management system. Also, it helps to work with someone who has had experience with different providers; this can help identify which provider would best match a particular plan sponsor's goals."

One area where clients and advisers "may slip" when conducting a vendor search on their own is in scrutinizing fees, Shapiro commented; they may focus on hard-dollar fees or administrative costs over investment management fees. "Administrative costs are important, but investment management fees are a larger component of the total cost," she said. "It's hard to look at investment fees, because they're netted out of returns. This kind of fee information isn't hard to get, but it's easy to forget. If you're not writing a check for it, it's easy to overlook it. But in down markets, investment management fees have a huge impact. In an up market, it's easier to forgive higher expense ratios; in a down market, you'd rather have a fund with a lower expense ratio."

Shapiro described critical elements in the search for a plan vendor to include the following:

  • Investment management. Is the manager's current investment structure appropriate? Are there gaps in the risk/return spectrum?
  • Plan administration and servicing. How are account teams and benefit service representatives set up? What is the technology in place to ensure that employee questions are answered quickly and accurately? What kind of reporting is given to the plan sponsor? What kind of strategic planning does the vendor provide?
  • The "access channel/participant experience." Does the vendor use voice response, a customer service rep, an Internet-based application, or some combination?
  • Investment education and communications.

Fortunately, tools are available to help plan sponsors navigate the 401(k) plan provider search and assessment process.

Search401k

Search401k enables users of its online service -- primarily retirement plan advisers -- to obtain customized 401(k) product comparisons, proposal requests, and due diligence reports, principally for employers with 1,000 or fewer employees. "In that world, most employers don't have departments to deal with their retirement plan. So they need to have someone else -- a retirement plan adviser -- involved. We're very much an adviser-driven service," Schneeman said.

Search401k's online provider comparison and search service lists 96 401(k) products. The providers supply 640-some data elements on their 401(k) offerings. Providers register and pay a fee to be included in Search401k's service. An adviser whose broker-dealer contracts with Search401k can use the service at no charge; other advisers pay a flat $195 fee for access to the provider guide with information about the providers listed in the service and the related request for proposal process.

"This is an industry that is very convoluted when it comes to issuing proposals and trying to get an understanding of fees and services," Schneeman said. "For example, the term 'participant' might mean someone eligible for the plan or someone actively using the plan; you might have 'active' and 'inactive' participants. Search40lk normalizes the data from the various providers so that when you get down to doing comparisons, you can get a true apples-to-apples comparison."

In conducting a provider search on Search401k, the adviser first enters in information about a client. Search401k use this information to cull through its database and produce a list of provider products that both meet the plan sponsor's service requirements and for which the employer meets the provider's underwriting requirements. From this list, the employer picks three providers to examine in more detail. The viewer sees side-by-side comparisons of administrative expenses, investment expenses, totals, and investment returns. A click on the provider product name links to a page with more information on that provider.

Three provider products may be compared at a time; the employer may return to obtain as many comparisons as it wants.

When the plan sponsor determines the providers from which it would like to receive a proposal, a click sends the proposal request to the provider. Providers receiving a request are required to respond within two days.

"Think about what plan sponsors usually must do to find a provider," Schneeman said. "They need to call all the different providers, find which ones have products that may be suitable for them, and then submit information that the provider wants. We give them the ability to have one place to put all their information, to find the products that are appropriate, and to request a proposal. So they do not need to make contact three or four times."

Search40lk also includes in its service an independent rating of 401 (k) products.

Search40lk debuted in July 2000. More than 10,000 advisers make regular use of the system, on average, 400 to 500 per day, Schneeman said. Personal identification numbers have been issued to more than 30,000 advisers.

401kExchange

401kExchange offers Web-based 401(k) service provider ratings and plan proposal, analysis, and due diligence services. 401kExchange includes 5,700 companies on its database, Lanman said; 500 of this group have been researched and rated by 401kExchange.

Using 401kExchange, an employer or its retirement plan adviser enters data about the company and what it is looking for in its 401(k) plan. 401kExchange responds "with a laundry list of service providers that would even be interested in the company's business," Lanman said. "This essentially presents the employer with a short list, generally 15 to 20 vendors." The list is pared down quickly because "providers are very specific about the business they want. For example, many providers do not want start-up plans, while a few actively seek start-ups. Many companies require a minimum number of employees."

The employer or adviser then selects those vendors from whom it would like to see a proposal. The employer submits the RFP electronically to 401kExchange, which then sends the RFP electronically to the selected providers. "Within four days, we receive the proposal back from the service provider," Lanman explained. "We aggregate all the information into an apples-to-apples comparison sheet, called the 'provider comparison report.' This report, running about 30 pages, looks at every element of a 401(k) plan, including fund choices, employee education, fee structures, fund management, etc. We send this to the employer or adviser. The start-to-finish process, beginning with the electronic RFP, takes seven days. This is a quantum leap over the standard way of doing business."

From the provider comparison report, the employer chooses two or three finalists. 401kExchange sets up a telephone introduction between the plan sponsor and these providers (who until now did not know the identity of the company whose plan business they have been bidding on). This is the end of 401kExchange's active involvement in the process.

Service providers that respond to an RFP pay 401kExchange a transaction fee for the opportunity to respond to the proposal requests (they pay no fee to appear in the directory). The fee ranges from $75 to $150 per RFP, the lower amount being charged for business through private labeled broker-dealer sites.

401kExchange launched the Web site in February 2000; the firm recently exceeded $4.5 billion in plan assets, representing more than 2,500 plans, transacted through the site.

William M. Mercer

For larger clients, William M. Mercer provides a deep evaluation of a smaller universe of 401(k) providers.

Mercer asked plan providers to respond to a capability questionnaire, and built a database to store the information. The database includes the answers of more than 40 large nationwide vendors to 200-plus questions. The database is broken down into 15 main criteria, followed by about 250 specific sub-criteria. Mercer reviewed the responses, and contacted the vendors to clarify answers. Mercer then benchmarked the vendors on all sub-criteria with a rating (generally) of one to five, with three representing a standard market offering. The database includes the vendor's responses, along with a benchmark.

"The database helps us determine potential RFP recipients," Shapiro explained. "We plug in employer criteria and do a run of the database to determine which vendors best meet the plan sponsor's objectives. Furthermore, our RFPs now don't look the way they did before. For example, a plan sponsor might have six high-level objectives; we build specific, custom questions for each client around those objectives, and these are the only questions we ask the vendor to respond to in writing. We also include detailed fee charts for the vendor to respond to."

Mercer then takes each vendor's RFP answers and fee information, along with information on the database, to determine the finalists. It produces a report that rates the finalists, taking into account the client's weighting of each benchmark. The client receives this along with a narrative report that reviews the criteria and identifies where each vendor is above standard and below standard. Mercer also provides a side-by-side analysis for areas that the client deems important.

According to Shapiro, the database has cut down on the time needed to prepare the RFP, on the time the vendor needs to prepare proposals, and on the time needed to do the vendor analysis. It also ensures consistent, up-to-date and accurate information.

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