VideoWhen Patricia Gondolfo took over as CFO of Mount Kisco (New York) Medical Group in 1997, the last thing she wanted to do was spend time assessing the company's 401(k) plan. But she had to, because, as she describes it, "the plan was a mess, and there's no honeymoon period for a new CFO when you're dealing with something that important."
There were many problems. Tax-qualified retirement plans must be administered in compliance with several regulations requiring numerical measurements. This "discrimination testing" is a critical part of an employer's fiduciary responsibility, yet, as Gondolfo explains, "When the previous provider performed discrimination testing, there was no follow-up. In two of the four years, the testing was not performed at all." As she looked more closely, she found that Mount Kisco "had compliance problems across the board, and the Statement of Plan Design was a mess. There had been changes made to the plan, but the appropriate amendments were never rewritten."
Before the conversion, the plan was structured in such a way that 75 of the 500 employees of the health-services firm — the doctors — weren't able to max out their IRS-allowed contributions. "The plan had a 7.5 percent flat contribution for all classes of employees," says Gondolfo. "It's a high percentage, but even with that percentage the doctors were not able to go to the $30,000 maximum."
Moreover, plan participation among lower-paid staffers was poor, and the provider made no effort to increase participation levels. And the fees being levied struck Gondolfo as far too high, especially given the poor level of service from the provider.
Searching for an Answer
But before Gondolfo put the wheels in motion to find a new firm, she tried hard to work things out with the existing provider. Experts say that's wise, because shopping for a new 401(k) provider is time-consuming and complicated; as with any long-standing relationship, it's worth the effort to try to talk things out before moving on.
Gondolfo tried, but she found the firm disorganized and inflexible. In 1998, she began a search, and after a two-year odyssey Mount Kisco finally awarded its business to Springfield, Massachusetts-based MassMutual Retirement Services. Last May, the company moved about $30 million in assets to its new vendor, a switch that Gondolfo says was worth the work.
And work it was, especially for a company that wanted to implement an improved plan (introducing a vesting period and varying the maximum participation levels among different classes of employees) and get better service into the bargain. Gondolfo decided not to put a written request for proposal (RFP) out for response, as companies often do, but to interview more than half a dozen providers and then cull the contenders to a more manageable three or four.
"One thing we asked for was a lot of free analysis," she says. "We told them to look at our company, our current plan, our challenges for improving it, and make recommendations."
That not only helped Mount Kisco decide how to ultimately shape its plan, but also allowed Gondolfo to peer into the workings of various providers and see how responsive they could be to a complicated request. "I saw a big difference in the infrastructures of various companies," she says. "Some had great communication and teamwork between different facets of their operations, and some were completely disorganized."
That was important to Gondolfo because, contrary to what many might expect, it was not the investment performance of Mount Kisco's previous provider that was at issue, it was the company's underperforming administrative and communications programs. "I arrived during the biggest bull market in history," recalls Gondolfo, "yet 30 percent of the plan's assets were in cash! The 401(k) provider was not doing a good job of letting staff people know about their investment options and how to formulate a retirement strategy."
Mount Kisco's efforts to resuscitate its failing 401(k) plan highlight both the upside and the downside of shopping around. Ultimately, the company got service that it deems far superior to what came before, and the internal response has been positive. But the company endured some headaches, especially as the moment to switch drew near. "We felt the market might cool down at any moment," Gondolfo says, "and we wondered what would happen if we were in the middle of the transition and the market took a dip like it did in '87, and participants couldn't get at their accounts to make changes."
What the company feared, happened: It switched in May, during Nasdaq's misery, a final bit of tension in a process that no CFO would be eager to repeat. Gondolfo also says that if she had to do it again, she'd make one major change. "I'd choose the initial pool of service providers based on peer recommendations," she says. Instead, she used a consultant as a first-level screening process, as many companies do. "But you can narrow the field more quickly if a personal contact or someone you trust can vouch for the company," she says.
Not that she was a slouch when it came to getting the inside story: Gondolfo called 20 references for each provider, all long-standing clients at companies of various sizes. That allowed her to choose three finalists she felt very good about, but two of the three subcontracted the service component of their offering so they could concentrate on the investments. Perhaps because she had had a bad experience with service to begin with, Gondolfo decided that a full-service provider was the way to go. "MassMutual is not the sexiest company in the world," she says, "but they're stable and have deep expertise in all facets of the business."
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