VideoThis is the second part of a two-part series. This month's article features insurance companies and banks. Last month, we featured investment firms and alliance partners.
Despite the hassles employers that switch 401(k) plans inevitably face, an estimated 15 to 20 percent take the plunge every year.
It is not masochism that drives the decision. Often technology plays a role, including the threat of the ubiquitous Y2K bug. "Employers want to know if their service provider can handle Y2K in their records," says David Wray, president of the Profit Sharing/401(k) Council of America, in Chicago.
But the trauma of confronting the new millennium is not the only reason companies decide to switch. Mergers and acquisitions among plan sponsors, consolidation in the 401(k) vendor market, and a desire for daily account valuation are key catalysts for switching providers, notes Pat Pou, a principal at benefits consulting firm William M. Mercer Inc. in Los Angeles.
The good news for companies that sponsor 401(k) plans is that competition among vendors is growing fiercer. About 98 percent of employers in the larger end of the market (5,000-plus participants) already have 401(k)s, therefore "it's a takeover business," says Peter Starr, a consultant with Cerulli & Associates, a management consulting/research firm in Boston.
The competition means many sponsors can improve the terms of their plans by making a change. They often buy improved participant services for the same or even lower cost. They can expand fund options, add brokerage windows, and offer daily valuation. Thanks to the roaring stock market, some employers even qualify for cut-rate administration fees because the provider earns a bundle on asset management.
The bad news is there are fewer plan providers to choose from. If you haven't ventured out into the marketplace lately, you may be surprised by what you see. Some recordkeepers left the business rather than invest heavily in Y2K compliance. Other recordkeepers, such as Watson Wyatt Worldwide, decided to stick to consulting rather than compete against the largest providers, like Fidelity Investments, Vanguard Group, and State Street Global Advisors. Together, this threesome managed 37.6 percent of 401(k) assets in 1997, up from 31 percent in 1996, according to Cerulli.
Obviously, mammoth providers can spread their costs over a wider user and asset base. "Often, the investment management fees subsidize the record-keeping function," Starr says. For plans with 1,000 or more lives, average recordkeeping costs have dropped from 0.17 percent of assets in 1995 to 0.12 percent of assets in 1997, according to the Cerulli study. Investment fees have also declined, from 1.09 percent of assets in 1995 to 1.02 percent of assets through 1997.
Providers continue to try to distinguish themselves by offering more bells and whistles, such as Internet access and education. "As investment platforms get more open, there is less differentiation by investments," Starr explains. "So, if you can't differentiate yourself by investments, you try to differentiate by functionality."
As more plans adopt these administrative accoutrements, the pressure increases for sponsors to offer them, too. To attract employees used to convenience, employers need to upgrade plan service, says Jerry Rigg, senior vice president and director of human resources for the investment bank Donaldson, Lufkin & Jenrette, in New York.
DLJ is moving its 401(k) plan to Fidelity this spring. Instead of 4 investment choices and monthly valuation, DLJ's new plan will feature 19 options and daily online valuation. "Our investments have outperformed the S&P for the past 15 years, so most people were pleased [with the old plan]," says Rigg. "But we decided to be more responsive to the new people who are accustomed to a larger number of investment options."
DLJ's decision reflects the buyer's market for 401(k) plans, but even in a buyer's market, some buyers get much better deals than others. The marketplace's interest in your business may be constrained by the size of your company or its particular 401(k) needs. Finding a vendor is never easy, and assumptions about services and price may not be realized. There is also the inevitable pain of transition, during which many employees may be frustrated by the blackout period that freezes most common transactions.
Betty Crocker's New Recipe
For General Mills Inc., the surprise was that many of the larger players in the 401(k) business sat out its bid, making for a difficult search to upgrade its 401(k) plan. The primary reason: General Mills's finance department manages the money and will continue to do so, believing that the higher expense ratios of retail funds harm investment performance. General Mills is not alone in this. Roughly 18 percent of 401(k) assets held by employers with 5,000 or more employees are managed in-house, Cerulli reports.
With 10,000 401(k) participants, the Minneapolis-based food manufacturer and purveyor of Betty Crocker products had begun evaluating the need to change its plan design--which had been an in-house operation--two years ago. A task force, drawn from finance and benefits staff, along with three representative employees, recommended adding a brokerage window and increasing the hours of the customer call center, according to Michael Davis, vice president of compensation, benefits, and staffing. The $6 billion company also decided to use an outside vendor as recordkeeper rather than continue to administer its plan records in-house.
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