Beyond Data Mining

One of the more important tasks in setting up a 401(k) plan is hiring a good recordkeeper. After all, the recordkeeper provides most of the basic services for a plan, and sometimes the investment lineup. A plan adviser who not only knows what to expect, but also how to demand the proper level of service, can play a critical role in assisting the plan sponsor in hiring a recordkeeper, as well as switching to a new provider when things are not working to the satisfaction of plan trustees.

Chris Augelli, Vice President of Alliance Programs and Business Development with recordkeeper ADP Retirement Services, acknowledges that services in the defined contribution industry largely have been commoditized at this point. Therefore, he counsels, advisers have to look beyond the service features themselves to the “service value” of what they will be getting. “Who can take those services and partner with me, the adviser, and give those services to the client sponsors,” he asks. “Each plan sponsor is going to have unique needs.” It is the adviser’s task to determine which recordkeeper can best meet those needs.

Although the recordkeeper ultimately is selected by, and providing services to, the plan sponsor, Augelli stresses that a vital element of a successfully run 401(k) plan is the partnership forged between the provider and the adviser. “There’s a continual sharing of information between the provider and adviser,” he says. “We need to complement each other’s strengths. It’s all about the cultural environment of the provider.”

What To Consider

Anton Bayer, Senior Vice President with CBIZ Financial Solutions in San Jose, California, says his firm examines four areas when searching for a recordkeeper:

• The functionality of the recordkeeping platform and how well it meshes with the client’s plan design, especially in areas like payroll processing, data feed, Web site access, and trustee information access.
• The benefits a provider can offer directly to participants—access to information, consumer confidence in the company, and consistency of service delivery.
• The type of investments being offered, and the size of the investment menu.
• The fee structure the provider will charge the sponsor.

Pricing, always a factor for advisers to consider, obviously has become very competitive in the recordkeeping industry. Yet, price should not always drive the decision of which provider to hire, suggests Christine Soscia, Vice President and plan consultant with 401k Administrators in Las Vegas, Nevada. “The question is, what’s best for participants?” she explains. The best recordkeeper for a plan is not always the cheapest.

Over the next several years, experts anticipate that the recordkeeping industry will continue to concentrate on developing methods to make the 401(k) process easier for participants, in part by incorporating more automatic features, and creating more effective education programs.

One thing to keep in mind when evaluating services provided by a recordkeeper is the plan demographics. For example, Soscia points out that some recordkeepers communicate primarily with a plan’s participants through a Web-based service. That might not work well for a plan with a large number of participants lacking Internet access or computer sophistication. Plan sponsors and advisers should be picking a recordkeeper who can best serve the specific demographics of a plan’s workers.

Education is another participant consideration. Every adviser offers varying levels of education; some use the recordkeeper’s support services and some do not. Many experts in the 401(k) field believe a plan will help participants only if it has a strong education and communications program. Sophisticated technology also can make a big difference in the success of a plan, particularly if it allows a plan to be run efficiently and seamlessly, integrates retirement benefits with payroll services, and automatically updates information needed by a plan sponsor. “You want to find a provider that takes you to the next step,” advises Augelli.

Another technology factor to consider is the recordkeeper’s sophistication of services. For instance, the Pension Protection Act (PPA) has eased the way for the implementation of automatic enrollment, and most providers now have systems that support that approach. However, how many providers also offer another PPA feature: automatic escalation of contributions? Plan sponsors might not be ready to embrace that feature immediately, but advisers can keep in mind how flexible the technology is should the client change his mind later and decide to offer such services. Also, it is important to know how much help the recordkeeper can provide in satisfying the new notification requirements related to automated arrangements and the qualified default investment alternative (QDIA) rules, if applicable.

Investment Availability

Although open architecture has spread to many recordkeepers, many firms still have proprietary fund requirements or limitations on what funds are offered. Advisers can help plan sponsors stay abreast of those offerings—including asset allocation funds. It is likely that more target-date funds will be offered to help participants minimize the number of investment decisions they will have to make. Some advisers believe collective trust funds (CTFs) and exchange-traded funds (ETFs) will become increasingly prevalent in the 401(k) arena.

At the same time, spurred by the negative returns many participants experienced over the past year, providers are seeking to create new guaranteed-income investment products to help participants hold onto their assets (see “Funding a Carefree Retirement“). Advisers can help plan sponsors evaluate these offerings if they are inclined to offer a retirement income product.

Slippage in the equity market also is likely to precipitate more churn as sponsors and participants express dissatisfaction with returns on investments, and may mistakenly associate that with the recordkeeper, rather than the overall market. Advisers can add some context to the discussion and, in so doing, spare sponsors from rushing into a perhaps unnecessary conversion to a new provider. Moreover, conversion fees and administrative headaches must be scrutinized carefully to ascertain that the transition is in the best interests of participants. “Even the most simple conversion can be painful for people,” says Soscia. “There needs to be a good conversion team in place with the new recordkeeper.”

Illustration by David Jien