Here Are 5 Easy Ways to Find Out!
In the past 30 years, I have had the opportunity to review hundreds of 401k plans sponsored by small to mid-sized employers. Although none of these plans are exactly the same, they can generally be characterized as falling into one of two categories: a product or a service. In almost every regard – investment options, plan design, plan costs and customer service – the best plan providers offer services at a much lower cost than providers who treat 401k as a product.
When I began my investment career in the early 80’s, cost effective 401(k) provider options for employers with few or no assets were limited to large mutual fund families and insurance companies. The business and tax advantages which motivated employers to sponsor these plans was a significant opportunity for providers who had expertise in offering pooled investment options (i.e. Mutual funds), data management (i.e. insurance companies), or both. Therefore, it was not surprising for these providers to treat 401(k) plans as a one-size-fits-all product, restricting investment options to proprietary funds (expensive) and to streamlined plan designs which featured hidden fees and were easier to administer.
As a plan sponsor, it is important to know whether your current providers treat your plan as a product or a service. Providers who treat 401k as a product have restrictions that lead to higher fees, lower plan returns, lower participation and poor customer service. While providers who treat 401k as a product are still very common, they should be avoided at all costs. On the other hand, providers who treat 401k as a service have fewer investment restrictions, consultative plan design and personalized customer service.
So how does your plan stack up? I would suggest the following 5 criteria will indicate whether your current plan provider treats 401(k) as a product or a service:
1. Restricted Investment Choices vs. Open-Architecture Investment Platforms
Mutual fund companies that bundle recordkeeping and/or administrative services with investment management typically restrict their plan investment choices to proprietary funds as opposed to the top funds available for each investment category. Often, these funds have hidden fees and higher expenses than more competitive funds. Insurance companies typically offer insurance products such as variable annuities with higher wrap fees and other expenses but disguised as mutual funds. Payroll companies often sell plans with pre-set investment options that are sponsored by both mutual funds and insurance companies. These pre-set plan lineups streamline their setup and administration yet represent less competitive investment choices and higher costs to participants. Plans like this are a product.
On the other hand, many independent record-keepers offer impartial investment fund advice through “open-architecture” platforms. These platforms allow plan sponsors or their advisors to access investment options based on quantifiable values of performance, volatility, fees and other criteria. They also allow access to index funds and target-date funds with significantly lower expenses than actively managed funds. Fee based advisors love open-arch platforms because they provide more fund choices at lower cost. These plans offer 401(k) as a service.
2. Retail vs. Institutional Share Classes
The mutual fund industry has evolved over the years in response to fiduciary concerns regarding fees. Share classes are essentially financial agreements between the fund company and the distributor of the fund (a broker, advisor or a retirement plan). As a result, investors can pay very different prices for the same fund depending on which share class they select. If your fund offers share classes other than R (retirement plans) or I (institutional) shares, you probably own “retail” shares and are paying higher expenses than you should. Ask your provider if these share classes are available for funds offered in your plan. If not, your plan is a product.
3. Hidden vs. Transparent Fee Structure
A 2015 study of 4,368 active retirement participants revealed that 58% did not know that they were paying fees on their employer sponsored retirement accounts. Translated, that means that nearly 40 million participants in qualified plans have little to no clue about plan fees. And for those that did know that they were paying fees, only one in four could accurately answer how the fees were calculated.
In my opinion, most of the confusion for participants involve indirect or hidden fees that are imbedded in the expense ratios of the plan investments. These can sometimes be difficult to identify and include revenue sharing arrangements with providers such as 12(b)1 fees and wrap fees associated with insurance plans. It is not uncommon to see indirect fees of over 1% for many bundled 401(k) plans, and even higher fees for insurance company plans. These additional expenses directly diminish investment returns and can have a profound negative impact on a lifetime of savings. Hidden fees indicate that your 401(k) plan is most likely a product. Transparent fees are an almost certain indicator that your plan is a service.
4. “Capturing A Few Signatures” vs Consultative Plan Design
A proper plan design must involve an exchange of important information between the plan provider and the sponsoring employer. This would include a recent census with hire dates and payroll information, identification of key and highly compensated employees, and understanding the specific employer motivations to establish and maintain the plan itself. Key decisions need to be made regarding employee eligibility, vesting schedules, employer match options, included compensation, contribution limits, among other important considerations.
Working with a provider who promises to set up your plan in 15 minutes by simply “capturing a few signatures” on the plan documents or checking a few boxes on a list should be a cautionary flag. You are probably being sold a product. On the other hand, working with a trusted advisor who is consultative and takes the time to guide you into the proper plan choices aligned with your business goals and values is a strong indicator that your plan is a service.
5. Call Center Support vs. Dedicated Relationship Managers
Sooner or later, you’re going to need help. It is important to understand the level and type of support available from your 401(k) providers. Those that provide 401(k) as a product offer support through call centers or require plan sponsors to open an online ticket for questions and issues. While this may work just fine for some day-to-day, non-urgent issues, when you sponsor a 401k plan there is a good chance that you will need urgent plan advice at least occasionally. The frustration and poor guidance that results from this impersonal and time-consuming support model is real and it can be costly.
When it comes to getting help with your 401(k) plan, you should choose providers who support their clients with a single point of contact where questions can be directed to a relationship manager who is accountable for a solution. Plans that offer this type of support have far fewer problems. Period. It indicates that your plan is a service, not a product.
It’s Time to Convert Your 401(k) Plan to a 401k Service!
With an increasing number of employers both scrutinizing fees and demanding higher levels of professionalism, there are far more 401(k) providers today who offer high quality services at reasonable and fully transparent fees. If you think it might be time for you to convert your “product” to a service, we can help.
Brian C. Rall
President – Strategic Retirement Partners, LLC
Strategic Retirement Partners is an independent, boutique investment advisory and consulting firm providing plan design, vendor search, investment selection, fiduciary guidance and participant education to company sponsored retirement plans.
Strategic Retirement Partners, LLC is a registered investment advisor in the State of Washington. The investment advisor may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Any information contained herein or on SRP’s website is provided for educational purposes only and is not intended to make an offer or solicitation for the sale of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated are not guaranteed. SRP does not provide legal or tax advice and clients should consult their attorneys and CPA for any strategy discussed herein or on this website.