Data & Research August 27, 2015

Small 401(k) Plans and Big Opportunity

A big market with needs to match, the small 401(k) plan market is fragmented and lucrative.
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Providers and advisers looking to service small 401(k) plans with fewer than 500 employees could find what Celent calls a greenfield space with plenty of opportunity.

Small companies employ a third of the American workforce today, Celent observes, but their 401(k) plans, where they exist at all, are expensive, cumbersome to operate and skewed toward expensive funds.

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Firms like ForUsAll, Honest Dollar, DreamForward Financial, Capital One Investing ShareBuilder 401k, Employee Fiduciary, and Ubiquity Retirement + Savings (formerly The Online 401k) have responded to the dearth of adequate infrastructure in the small-plan space by rolling out automated platforms that streamline processes and eliminate back-office paperwork. Most crucially, these firms are driving down costs to the benefit of the participant and the small-business sponsor, who can now afford to access the flexibility (in terms of plan design and contribution levels) and tax benefits intrinsic to the 401(k).

Celent points to the factors—regulatory reform that is weighing on traditional compensation and fee structures, the increase of working-age Millennials and rising interest in investments that address retirement income—that are changing how 401(k) plans are delivered to these smaller firms. “Nimble and digitally focused firms are staking claims to this lucrative and fragmented market,” the consulting firm says in “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors.”

NEXT: Plan services and administration move downstream.

The report explores how a new generation of plan providers is making 401(k) administration less painful and more cost-effective for smaller companies, providing them access to services previously reserved for much larger firms.

Small providers will get a tailwind from the imposition by the Department of Labor (DOL) of a uniform fiduciary standard, with the fee transparency that entails. The entrance into the workforce of Millennials, whose self-directed but advice-friendly mindset aligns closely with the tech-driven model propagated by the new generation of providers, represents another potential inflection point.

“Once participants realize the extent to which they are being dunned of their retirement savings, some may change jobs; others will spur their employers to explore new provider options. The voices of these participants will echo loudest at the small end of the market,” says William Trout, senior analyst and author of the report.

The report, third in a retirement investment series, examines why small plans can be so expensive; the advantages of the 401(k) plan over other types of defined contribution plans and the offerings of new plan providers. A detailed comparison of six new providers of small plans—Ubiquity Retirement + Savings, ForUsAll, Honest Dollar, Dream Forward Financial, Employee Fiduciary, Capital One InvestingSharebuilder401k—outlines their key features, investment offerings and fees. A previous report looked at how advisers can better serve plan participants.

More information about “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors” is on Celent’s website.

Compliance August 27, 2015

Boeing Settles ‘Spano’ Fee Case

Plaintiffs’ attorney in the case confirms provisional settlement has been reached in class action filed on behalf of 190,000 Boeing retirement plan participants. 
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Boeing has reportedly moved to settle Spano vs. Boeing, with news of the settlement coming a day after the long-running 401(k) fee case was slated for another round of arguments before a district court.

Earlier this month the U.S. District Court for the Southern District of Illinois said it would hear new arguments in the case August 26, but according to the law firm Schlichter, Bogard and Denton, Boeing has instead decided to settle accusations that it violated Employee Retirement Income Security Act (ERISA) provisions. Terms of the settlement were submitted to the court, but were not immediately available online or from the parties.

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Jerry Schlichter, the lead plaintiffs’ attorney in the case, confirmed for PLANADVISER that a preliminary settlement agreement has been reached and agreed to by both parties. While subject to court approvals and potentially other restrictions, Schlichter says his clients are “pleased to have reached this provisional settlement,” and that it would be implemented “for the benefit of 190,000 employees and retirees of Boeing.”

It’s a rather abrupt conclusion to one of the original and longest-running examples of 401(k) excessive fee litigation. Plaintiffs in this particular case alleged that Boeing violated ERISA by permitting a variety of excessive fees to be charged to 401(k) plan participants. They also claimed that Boeing engaged in self-serving conflicts of interest, and permitted imprudent funds to be included in the company retirement plan.

News of the settlement closes a nearly decade-old case and comes the better part of a year after a district court denied Boeing’s request for summary judgment on the merits of Spano vs. Boeing. The court granted in part and denied in part Boeing’s motion for summary judgment based on ERISA’s six-year statute of repose. It also denied plaintiffs’ motion to strike certain reply briefs filed by Boeing—all of which could impact the terms of any settlement. 

The case has already resulted in a series of important rulings, following initial class action certification in 2008. A subsequent appeals court ruling from Circuit Judge Diane Wood confirmed that situations in which a retirement plan as a whole is injured at the same time as an individual employee can arise when the entity responsible for investing the plan’s assets charges fees that are too high or when the plan has been reckless in its selection of investment options for participants—and thus that class action suits can be leveled against employers in such circumstances.

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