Human Capital & Careers

Eye on 401(k)

When shopping for a provider, a hands-on approach will ensure a smart match.
Meg GlinskaApril 1, 2001

When 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.”

A Question of Values

But all the due diligence in the world won’t necessarily lead to a smart choice if a company doesn’t know what it’s looking for to begin with. “It’s difficult to find one service provider that can do absolutely everything for every client,” says David Katz, managing director with Barra RogersCasey, an investment consulting firm in Darien, Connecticut. “If you’re in the market for a provider, you have to start by clarifying your objectives.” That means companies need to decide what value they place on name recognition, administrative services, employee education, use of technology, fund performance, and other issues. Some companies, Katz says, have a savvy employee base and don’t need much in the way of education. But they may want as much administrative help as they can get so their internal resources aren’t strained. Others may want their employees to be able to make fund changes with a wireless, handheld device such as a PalmPilot. In fact, knowing the demographics, and the preferences, of your employee base is at the heart of determining your overall needs in a 401(k) provider.

Consultants often help companies clarify those needs by, as Katz says, “knocking providers off the list as we learn more about a client’s needs.” Getting to a short list fast is the main reason companies use consultants; relying on someone else to issue and evaluate RFPs is a close second. But for some companies, especially newly created companies, having someone in-house who really understands 401(k) and related issues can be a huge asset.

That’s what Bruce Mullen decided, anyway. Last May, he found himself ensconced as treasurer in the newly created Vantico Inc., a Brewster, New York-based manufacturer of adhesives, coatings, and related products that had just been spun off from Ciba Specialty Chemicals. The company’s pension and 401(k) plans were managed separately, and Mullen wondered if that would pose a compliance issue down the road. After attending a midsize pension management conference last fall, he decided to solicit bids from eight providers that might be able to handle both the defined-contribution (DC) and defined-benefit (DB) portions of Vantico’s retirement plan. He put together a 20-page RFP, narrowed the six companies that responded down to three, and paid site visits to each so he could get a feel for their operations.

All three were very close, he says, and any one of them probably would have worked fine. What helped him sort through all the options was knowing what was most important to him — in this case, the ability to bundle DC and DB services into a single offering. “By comparing notes with other conference attendees,” Mullen says, “I saw that we, in fact, offer a very good retirement program. I wanted to find a provider that could showcase that, that could do things like let our employees do Web-based financial modeling and take into account both their pension and their 401(k) plan. So bundling was crucial.”

Once a company has decided which plan features matter most, a very important next step is to sort out fees, says Liz Weber, principal and mid-Atlantic partner in charge in the compensation and benefits practice of KPMG. Companies vary greatly in this regard, and scrutinizing RFPs or sample contracts is imperative. “Ask your candidates to be specific about which services are covered for the estimated fees and which aren’t,” says Weber. “Some companies charge extra for hardship withdrawals and loans.” Related to that are administrative issues. For example, some have call centers that can process loan requests, while others leave this task to a client’s HR department. “If you have a sizable percentage of employees with loans at any one time,” says Barra RogersCasey’s Katz, “that can be a huge issue.”

Both Weber and Katz use a matrix so that potential 401(k) plan providers can be evaluated on an apples-to-apples basis, and both strongly recommend a site visit to the finalists. In fact, Katz says that by the time a client has narrowed the choice to two or three companies, the differences are often so minimal that the site visit will actually determine the winner.

If a face-to-face meeting doesn’t decide, odds are that technology will. Financial services firms were among the first to embrace the Internet, and they continue to set the pace. But the difference in capabilities from one firm to another can vary considerably, and as customers become more demanding, this becomes a critical area of differentiation.

Deborah Mings, CFO of Nelson Staffing Solutions, a staffing firm in Sonoma, California, recently opted for a new company to handle the administrative portion of its 401(k) plan (the investment portion remains with a mutual fund company), primarily to satisfy employee requests for Internet account access. “A lot of people suddenly started asking for this,” says Mings, “so we found two companies that offered it, and we went for the one that seemed to have the most user-friendly design.”

Internet capabilities are a blessing to plan sponsors as well. Tammy Evans, benefits manager at Techneglas Inc., a television-glass manufacturer based in Columbus, Ohio, says, “I wanted that functionality so that when employees ask me about the plan, I can get at the information quickly.” The company has established a “learning lab,” where employees unfamiliar with Web access can learn how to retrieve their own account balances and other information online. “We felt that we needed to push employees into helping themselves,” says Evans. “They’re already learning how to look up information on repairing factory equipment and handling other aspects of their job, so giving them online access to benefits information is a logical extension of that.”

The Internet may be appealing to companies of all sizes, but other aspects of 401(k) plans don’t have such an equalizing effect. While a handful of providers offer services to companies of all sizes, in general the market is strongly segmented; the vendors a small company is likely to consider will be far different from those a multinational evaluates. Sometimes that’s a blessing. “Small companies can take advantage of an existing relationship with a bank or insurance company, or even a CPA, to lead them to a suitable 401(k) provider,” says David Wray, president of the Profit Sharing/401(k) Council of America, a Chicago-based trade association of plan sponsors. That way, they can avoid consulting fees and find a partner relatively quickly.

That, however, means a company may outgrow one or more providers as it matures, forcing it to search yet again. That was a key consideration at StorageNetworks Inc., a data storage service provider in Waltham, Massachusetts, that wanted to find a company it could stick with as it grew. “Some vendors want to give you a prepackaged plan aimed at small businesses,” says Lori Erickson, senior vice president of HR. “When you reach a certain size, you have to go through a major change. We wanted to avoid that by choosing a company that is flexible enough to change its services as our needs change.”

Fred Reish, an Employee Retirement Income Security Act attorney and partner at the Los Angeles law firm Reish Luftman McDaniel & Reicher, says that companies with $1 million to $5 million in assets often face a limited and fairly expensive market for providers. “Between $5 million and $10 million, it starts to open up,” he says, “and once you cross $10 million, it becomes very competitive on flexibility, costs, and levels of service.” Companies owe it to their employees to explore new options as the plan grows, he says, and while that entails some legwork, the savings can be worth it. Small plans may pay 1.5 percent, or more, of assets under management in expense ratios, while companies with $1 billion in assets may pay only two- or three-tenths of a percent.

In studying the proposed contract, be especially vigilant about any clauses that relieve the vendor of liability. “I saw one case where the vendor included a provision that said, ‘We’ll supply you with administrative information at year-end, and if you don’t object to anything within 30 days, we’re forever released from liability,’” says Reish.

The 401(k) plan was launched 21 years ago, and today there is an astounding $1.5 trillion invested. Plan sponsors are experienced and fiercely competitive, which is good news for companies looking to make a change. Those that determine their priorities, take a hard look at the firms that seem best able to meet those needs, and draft contracts that clearly spell out roles, responsibilities, and repercussions should be able to offer employees very good retirement plans at a reasonable cost.

Meg Glinska is a freelance writer based in Boston.

A Buyer’s Checklist

A well-organized vendor evaluation assures a wise decision.

1. Define your objectives. If you know what your primary goals are, it will be easier to identify vendors offering services that best fit your needs. To do that, “it’s helpful to look at your current provider and identify problem areas and gaps in service,” says Liz Weber, a principal and mid-Atlantic partner in charge in the compensation and benefits practice of KPMG. You may be able to rectify problems with your provider. If not, you’ll know what your priorities are as you investigate others.

2. Know the 401(k) marketplace. Understanding the different types of solutions available to meet your specific needs is essential, according to David Wray, president of the Profit Sharing/401(k) Council of America. Some companies offer a full array of services, some bundle solutions for various markets, while others specialize in one facet, such as, record-keeping or education and communication.

3. Develope a request for proposal. Experts agree a properly drafted RFP can help sponsors gather data on different providers in a consistent and efficient way. It should gauge vendors’ capabilities in the areas of client services, investments, fees, plan administration, and participant communication and education. Create a matrix so response data can be studied consistently across all candidates.

4. Narrow the field, and pay a visit. Once the list of candidates is narrowed (typically to two to four companies), interview the finalists, preferably at their record-keeping and service-center facilities. “You want to get comfortable with the people who will be responsible for your account,” says David Katz, managing director with investment consulting firm Barra RogersCasey. And don’t forget to carefully quiz a range of references.

5. Develop a transition plan. According to Hewitt Associates’s Scott Peterson, a vendor’s experience with plan conversions should be an important criterion in the selection process. While there are plenty of horror stories about botched transitions, a competent vendor can do a lot to ensure that the process goes smoothly. —M.G.