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Financial Services Industry

Selecting a 401(k) plan provider: Navigating the maze

Global Finance, Sep 2003 by Platt, Gordon

PENSION PLAN MANAGEMENT

There are thousands of 401(k) plan providers to choose from. The consequences of making the wrong choice can be painful.

For US companies, a 401(k) plan is an important tool to attract and retain competent employees and to help them prepare for a comfortable retirement. But these plans can also be the source of heartbreak and lawsuits if not handled properly.

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On June 26 the US Department of Labor sued Enron, its former top executive officers Kenneth L. Lay and Jeffrey K. Skilling, the company's former board members and the former administrative committee of Enron's retirement plans for failing to prudently protect plan assets invested in Enron stock. The suit, which was filed in federal district court in Houston, seeks an order requiring the defendants to restore to the plans all losses with interest, forfeit their right to benefits from the plans and be permanently barred from serving as fiduciaries to any plan governed by ERISA.

The Employee Retirement Income Security Act of 1974, ERISA also makes vendor selection a fiduciary responsibility. Fiduciaries must operate their plans solely for the benefit of plan participants and beneficiaries. Not only are fiduciaries personally liable for plan losses in the case of negligence or wrongdoing, but the company also is subject to negative publicity, says Pat Pou, Tampa, Florida-based principal at William M. Mercer, the human-resources consulting business of Marsh & McLennan.

"Governance issues are getting to be very important in the post-Enron environment," Pou says. "A plan sponsor needs to make sure that it exercises due diligence to hire a quality vendor. If the members of a selection committee do not have the expertise to do a thorough job, they should obtain expert advice," she says.

Bewildering Choice

The vast majority of large US companies already have established 401(k) plans. Philadelphia-based Hay Group, which maintains a database of benefits practices by US companies, found in its annual survey of more than 1,000 mid-size to large companies that 98% sponsored pre-tax retirement plans in 2002.

Joshua D. Dietch, associate director at Cerulli & Associates, a Boston-based management consulting and research firm, says there has been some consolidation in the ranks of plan providers in recent years. Still, there are hundreds, if not thousands, of providers for small companies to choose from. "If a company has $0,000 employees, however, there are only a handful of providers with the capability to adequately serve its 401(k) plan needs," Dietch says.

Bringing In the BIg Guns

Among the major providers with the ability to serve the biggest companies, Dietch says, are Fidelity Investments, Mellon Financial, CitiStreet (a State Street and Citigroup company), Hewitt Associates, Vanguard Group and Principal Financial Group. He says that approximately 75% of all 401(k) plans are served by providers that offer a bundled package of services. "Even the big companies don't do the record-keeping and plan administration themselves," he says.

To begin searching for a 401(k)-plan provider, most companies form an in-house selection committee or retain an outside consultant. "As a plan sponsor, fiduciary responsibility is something you never get away from," Dietch says. "You need to do a careful search."

It is impossible to generalize about whether a company is better off choosing a service provider that is an insurance company, a mutual fund group, a bank, brokerage house or third-party administrator, Dietch says. "Good providers come in every stripe," he says. "It depends on what you want."

Jeffrey L. Boyle, senior vice president and manager of investment services and asset management at Union Bank of California in San Francisco, says there are advantages to choosing a bank, rather than a fund group, to manage your 401(k) plan. Union Bank is the second-largest commercial bank in California and the largest bank provider of bundled 401(k) services on the West Coast. It has clients in 40 US states. The bank targets middle-market companies with up to 1,000 employees and $5 million or more in plan assets. It has $21 billion of defined-benefit assets under administration for 1,300 plans.

"An independent bank is not pushing its own investment agenda," Boyle says. "The fund companies want your investment-management business. We are not a mass-marketer. We develop relationships and partnerships with our clients." Hands-on servicing and flexibility in meeting customer needs are keys to success in the business, he says. With the bank's open-architecture platform, customers can choose from more than 1,000 funds. "We have clients who just love us," Boyle says. "With some of the larger fund providers, it's 'Do it our way, or it's the highway.' We are flexible and don't put our customers in a box."

Union Bank and Los Angeles-based 401(k) Pro have developed a Web-based plan-administration service for small businesses. The service allows clients to set up low-cost plans with numerous options.

Financial Services Industry

Selecting a 401(k) plan provider: Navigating the maze

Global Finance, Sep 2003 by Platt, Gordon

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