mjm financial, llc 401k workshop series - mjm401k | independent
TRANSCRIPT
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MJM Financial, LLC 401k Workshop Series
Successfully Managing the 401k RFP Process
June, 2005
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Today’s Agenda
• The current provider marketplace• Steps in the RFP process
– Defining plan needs and objectives– Providers
• Who to ask• What to ask
– Fee and investment analysis– Evaluation & selection
• Service, trust & advisor agreements• Other plan sponsor considerations• Q&A
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For the last twenty years, 401k plans have been sold rather than bought.
The industry has been dominated by the product manufacturers and product distributors.
The object of a good RFP and selection process is to change the emphasis from the sell side to the buy side, and help make the plan sponsor an educated buyer.
Changing the Emphasis
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The Current Provider Marketplace
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The 401(k) Company401k EasyABN AMROADPAIG ValicAmerican ExpressAmerican TrustAmeritas Life Insurance CorpAMVESCAPAUL Retirement ServicesBank of AmericaBB&TBISYS Retirement Services BOK FinancialCitiStreetCorrell Co.DailyAccess Corp.Diversified Investment Advisors EPIC AdvisorsFederated Retirement Plan ServicesFidelity Investments
Franklin TempletonGreat-West LifeThe HartfordHewitt AssociatesICMA Retirement CorpINGInvesmartJP Morgan Retirement Plan ServicesLincoln FinancialManulife Financial (Hancock)Marshall & IIsley TrustMassMutualMcCready & KeeneMellonMerrill LynchMetLifeMFSMilliman USAMutual of OmahaNational City BankNationwide FinancialThe Newport Group
New York Life Investment MgmtOppenheimer FundsPaychexPNC AdvisorsPrincipal Financial GroupPrudentialPutnam InvestmentsSchwab Retirement Plan ServicesScudderSecurianStandard InsuranceSunGard EBSSuntrustT. Rowe PriceTransamericaU.S. BankUnion Bank of CaliforniaThe Vanguard GroupWachoviaWells Fargo
Sample Plan Providers
Source: Plansponsor.com
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“Technological innovations will cause most companies to produce identical products and services. For companies to survive, they will have to become experts at confusing the public into thinking their generic products are better than their competitors’ generic products.”
Scott Adams, the creator of Dilbert
Funny…But True?
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Looking Ahead
• At present, most 401k plans overpay• Despite this, most providers are not wildly profitable
– Some make money, some lose money– 401k underperforms other business lines
• Marketplace changes– No new 401k formation in recent years– Providers swapping existing clients– Baby boomer retirements – Increasing fee pressures
• Consolidation and business “exits” will continue– Believe it or not, this may be good– Fewer better solutions
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Steps in the RFP Process
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• Experience with the process
• Detailed knowledge about providers
• Access to marketplace data
• RFP questions database
• Shield from provider sales force
• Cost money
• Have their own biases
• May not know you and what you’re looking for
• Have a process that may “take over” the search
• May filter a direct flow of information to/from the provider
Pros Cons
Should You Hire a Consultant?
Source: Plansponsor.com
Make sure that the consultant is a consultant!
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Step 1
Step 2
Step 3
Step 4
Define Needs & Objectives
EstablishCriteria &
Procedures Comparative Analysis
Select& Implement
Understand all of the plans requirements, as well as desired improvements. Document these carefully. Involve all stakeholders in this first step. Determine who will participate in the overall vendor selection process.
Set a realistic timeframe for vetting providers. Decide on which providers should participate and why. Establish evaluation criteria.
Score providers based upon replies and interviews. Distinguish the operational analysis from the investment analysis.
Implement standards, criteria and process for evaluating choices, both initially and on an ongoing basis, in light of plan and marketplace changes
Monitor
Steps in the Process
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Defining Needs and Objectives
• What has prompted the search/RFP?– Are there problems with the incumbent?
• List them all• Are the problems fixable without leaving?
– Are you just looking?• Benchmarking• 3-5 year rule/negotiating leverage
• Review of existing documents– Plan document & amendments– Investment Policy Statement (IPS)
• What must we have versus we would be nice to have– Ranking services and features by importance
• Understand what the various stakeholders want– The very few decide for the very many– Fiduciary duty & the exclusive benefit rule
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Who to Ask
• A reasonable list of potential candidates• Who not to ask
– Eliminate those who aren’t suited to your specific needs• TRO or TBO; multiple SDA (brokerage) options• Complex contribution formulae; company stock• Conversion target date
– Pre screen with phone calls• Provider types
– Look at their primary business focus (not bundled vs. unbundled)– Asset managers
• Mutual Fund, Insurance Company Bank, Brokerage Firm
– Non-asset managers• TPA’s, consulting firms, custodians, payroll providers
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ExamplesPlan Size Potential Providers
Micro/Start-Up
Small
Mid-Size
Large
• Hancock (Manulife)• Great West
• Principal• Wells Fargo
• Vanguard• T. Rowe Price• Milliman/Schwab
• Fidelity• Citi Street• Hewitt
• Newport Group/Matrix
• ADP
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What to Ask
• Organization & History
• Client Service & Quality Assurance
• Recordkeeping & Administration
• Compliance & Regulatory Services
• Plan Loans
• Reporting
• Website, VRS & Call Center
• Plan Conversion
• Systems Capabilities & Hardware
• Communication & Education
• Expenses
• Investment Platform
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What to Ask
• Sample questions from 401khelpcenter.com
• Provide very specific facts about your plan– Demographics
– Unique needs or constraints
– Goals and objectives
– Investments
• Request a three year cost projection based upon certain plan growth assumptions– If fees are asset based and assets double, do fees double?
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Loan Setup
Coverage Testing
ADP/ACP Testing
Audit Support
Form 5500 Information Only
Signature Ready 5500
Per Participant
Account Maintenance
Per Fund Fee
Trustee Fee
Plan Sponsor Website
Transactional and Educational Website
Conversion of participant records
Establishment of trustee link
Loan Conversion
Internet and Intranet Access
Toll-free Service Center
Toll-free Voice Response System
Wire Transfer Fee
EFT
QDROs Processing
Approval of DROs
Fund Transfers
Minimum Distributions
Installments
In-service Distributions
Hardship Withdrawals
Approval of Hardship Withdrawals
In-kind Distributions
Lump Sum Distributions
Loan Maintenance
Ad hoc reports
Tax statements
Programming plan changes
Consulting on plan changes
Administration manual
On site employee meetings
Investment advice available to participants - Ongoing
Investment advice available to participants – Setup
Retirement planning and modeling
Confirmation Statements
Enrollment
Determining Eligibility
Participant Statements
Internet Customization
Operational Expense Categories
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Plan Sponsor
Trustees
Record Keeping
Administration Directed Trustee
Custody
Consultant
Investment Options
Bundled Vendor
Participant Education
Fees likely to be paid direct from plan assets
Fees likely to be paid indirectly from plan assets
oror
Fee Elements
Cost of fund options plus
3 bps up to 12 bps
$1500 to $7500 per year
$25 to $125 per head plus
$1500 per day plus costs
Bps charge or flat $ per qtr.
35 bps up to 200 bps $1500 to $7500
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Investment & Fee Analysis
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The Typical Approach to Fees & Investments
• You send the potential vendor your current funds
• They propose mapping to new funds– 60-80% their funds
– 20-40% other name brands (American, PIMCO, Alliance Bernstein, Dodge & Cox, etc.)
• Depending upon plan size, the average fund cost will be between 70 and 150 bps– All other services (recordkeeping, compliance, trust,
education, etc.) will be free
– Certain participant costs (loans, distributions, etc.)
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A Revised Approach
• Take the provider out of the investment driver’s seat
• You propose the investments– Focus on retirement target portfolios or asset allocation funds
• Why? Because it’s asset allocation that matters
9%
91%
Asset Allocation Security Selection & Market Timing
Source: Brinson, Hood & Beebower; Determinants of Portfolio Performance
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Investment Objective
• Great portfolio options for our participants –– What can we do, how can we do it, and at what cost?
• Pre built– Lifestyle/Asset allocated/Retirement target
• DIY (build our own)– Manager & instrument choice
– Single NAV – fund look & feel
• Understanding the totality of the investment platform– What’s available and what’s not
– Provider requirements• Proprietary & partner
• Can we get (buy?) other access?
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A Revised Approach
• Give providers an investment structure to bid on– Assume 80-90% assets invested in “portfolios”
– Example • Vanguard Retirement Target series
• DFA Global Portfolios (I class)
• The responses will give you a better understanding of fees and investment parameters– Non-issue for non-asset managers
– For asset managers• Some may not do it; will suggest modifications
• Some may want certain minimum fund requirements
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Overall Fee Comparison
% %1.48% 0.47%0.00% 0.075%0.00% 0.10%0.00% 0.02%
-0.02%0.04%0.20%
1.48% 0.65%$390.95
Employee Education
($256.60)$171,238
$19,710$4,500
Per Head RecordkeepingAdministration & Compliance
$100
3 years 3 years$19.95
$20 per$75
Loan Processing - Annual Maintenance $25 $0$75 (per loan)
$25$5 per
$50$120
$$193,206($14,414)
$112,392
($19,710)($4,500)
($3,748)
($38,437)
$3,748
$24.95
$647.56
$150 (one-time)
$70
$50
$75included
included
SDA - Online Cost per TradeFee Guarantee
QDRO ProcessingSDA - SetupSDA - Annual Participant Charge
included$75
Online Advice Hardship Withdrawal Processing
Annual recurring costs $$90,424$14,414
$$283,630Investment Management
Trust, Custody & Trade Platform
Less Revenue Share Recapture
Distributions (of any kind)Enrollment Kits
Loan Processing - Setup
Investment Consultant (RIA)Total Recurring CostPer Participant
Plan Conversion $0 $5,000
$283,630
Non-recurring (ad hoc) costs
$38,437
Difference
$0
$7,500 ($7,500)
$0$0
Provider A Provider B
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Selection
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• Enrollment
• Communications
• Recordkeeping
• Administration & compliance
• Design & documentation
• Overall architecture
• Portfolio flexibility
• Portfolio structure
• Investment managers
• Financial instruments
Operational Investment
Understand the Distinct Functions
Remember, a 401k is an investment program that has specific operational requirements
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Provider Evaluation & Selection
• Tough decisions– Good vs. bad – EASY…. good vs. better vs. best – HARD
• First cut/second cut
• Rarely a clear winner
• Non-quantitative factors– Chemistry – look & feel of materials, etc.
• Default to investment platform?
• Ties go to the incumbent?
• Insider vendor relationships– The vendor has a formal or informal relationship with the plan
sponsor beyond the 401k plan• Greater degree of scrutiny & documentation
• Potential prohibited transactions & exclusive benefit violations
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Categories Fidelity T. Rowe PrincipalOverall Investment Platform 1 2 2Asset Allocation Strategies 2 3 2Likelihood of Business Persistence 3 3 3Service Culture 2 2 3Name Brand (participant perspective) 3 3 2Educational Materials 3 3 3Plan Document Flexibility 2 2 2Technology Development 3 3 2Overall Expense (Cost) 2 3 2Service Agreement 0 0 0
Ad Hoc Reporting 0 0 0Education Delivery/Participant Services 2 3 3
24 28 27Total
1 = Good 2=Better 3=Best
31Local Presence 1
Evaluation & Selection
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Service, Trust & Advisor Agreements
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Service, Trust, and Advisor Agreements
1. Term provisions.a. What is agreement’s term?
i. Evergreen clause?ii. Termination notice requirements.
b. Early termination fees?c. What documents does client get upon termination?
2. Indemnification provisions.a. Who is indemnified?b. Under what circumstances is provider indemnified?
i. Gross negligence vs. mere negligence.ii. Notification provisions. iii. Exception for negligence, gross misconduct or fraud.
3. Trust statement provisions.a. Trustee free from liability unless error in statement not discovered and
reported within 30-60 days?i. Exception for negligence, gross misconduct or fraud?ii. Can number of days for reporting error be expanded?iii. Can trustee remain liable for period under statute of limitations?
4. Governing law, Arizona or State where provider has headquarters?
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Service, Trust, and Advisor Agreements
5. Venue, i.e., place where litigation over agreement will be held.
6. Arbitration.a. Binding?b. Venue?c. Who picks arbitrators?
7. Float income.
8. Liability caps.
9. Testing to be performed?a. Explicit statement of tests to be performed?b. Statement of hard copy of testing to be given to client?
10. What other services will TPA perform?a. Prepare plan and/or SPD/SMMs, 5500, SAR?b. Plan administrative manual.c. Distribution processing, 1099Rs, 402(f) tax notice, distribution
forms and necessary consents.d. QDRO, loan, withdrawal administration.e. Cost of any additional services to be provided.f. Control group and affiliated service group analysis.g. Vesting and eligibility determinations.
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Other Plan Sponsor Considerations
• Site visits
• References– Get them & call them
– Get a few who left within the last 18 months
• Miscellaneous considerations– Are you currently in discussions regarding the sale, merger or
disposition or your 401k business?
– Any system conversions planned within the next 12 months or implemented in the past 6 months?
– 401k specific litigation?
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Resources for Sponsors
• Fee disclosure worksheets– http://www.dol.gov/ebsa/pdf/401kfefm.pdf
– www.psca.org
• Recordkeeping Surveys & Product information– www.plansponsor.com
– www.cfo.com (401k buyers guide)
– www.401kexchange.com
• Articles and other resources– www.401khelpcenter.com
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Thank You