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www.financial-services401k.com for information about 401k resources for small businesses-Topics include: - 401k advice and information, - 401k advice for small businesses,
- 401k education services, - 401k savings plans, - ABCs of 401k

www.discountbrokers401k.com for information about micro 401k plans for small companies-Topics include: - 401k plans idea for small businesses and micro 401k plans for
micro businesses, - small business plans for 401k, - small business development and 401k, - free 401k for small companies, - small business retirement plans

www.401k-software.com for information about 401k administration software for small companies-Topics include: - 401k software download, - 401k administration software,
- HR software for 401k administration recordkeeping, - run-it-yourself 401k software for small businesses

www.mutual-fund-401k.com for information about mutual funds used in 401k plans of all sizes-Topics include: - participant directed 401k mutual fund accounts, - low cost
401k for small businesses includes self-directed 401k mutual funds, - self-directed retirement accounts, - mutual funds 401k investment

www.age-target401k.com for information about self-directed 401k accounts help eliminate revenue-sharing-Topics include: - 401k Plan Revenue Sharing...A Dishonest
Practice at Best, - Why would the largest record-keepers do this?, - What will 401k plan participants gain from disclosure of mutual fund revenue sharing amounts?,
- Shedding Light on 401(k) Fees, - When Investing Meets 401k Revenue Sharing, - Recordkeeper XYZ only works with funds that provide revenue sharing, - When Investing
Meets Revenue Sharing, - Importance of 401k Fees, - 401k Plan Revenue Sharing...A Dishonest Practice at Best

www.self-service-401k.com for information about human resources small 401k plan software-Topics include: - 401k software for small businesses and HR departments
-- free download, - COBRA, workers compensation, and workplace savings, - 401k human resources software, - 401k HR software for payroll and 401k, - employee
compensation and benefits, - workplace retirement savings

www.401k-program.com for information about enrolling participants in the 401k-Topics include: - Planning 401k Enrollment Meetings, - Questions & Answers Regarding 401k,
- 401k Enrollment Meeting Guidelines, - Economic Growth and Reconciliation Act

www.401k-enrollment.com for information about why your should consider joining your company's 401k plan.

 

Commentary

HOW IS THE ADMINISTRATION OF 401k PLANS STRUCTURED?

The administration of any 401k plan is substantially prescribed by the provisions of law and Federal regulation. Current law requires the development of a plan document as a part of the set-up of the plan as well as the submission of annual reports (Form 5500) that require extensive recordkeeping and preparation. Additionally, the tax code requires annual nondiscrimination testing to ensure that highly compensated employees do not contribute in excess of their ceiling. In 1995 a survey found that 61% of 401k plans discovered that the contributions of highly compensated employees must be restricted or adjusted as a result of nondiscrimination testing (Hewitt Associates). However, recent legislation enables plan sponsors to determine the allowable contributions of highly-compensated employees on a prospective basis, eliminating the need to make ex-post account adjustments.

These administrative requirements impose a cost. ERISA and its interpretive regulations require additional recordkeeping including periodic account statements to plan participants, at some cost to plan sponsors, participants, or both. Many plan sponsors choose to purchase this administration from service providers in lieu of using internal staff. A survey disclosed that in 1996 less than 5% of plans were being administered in-house exclusively and only 30% by in-house staff supported by vendors (Spencer & Associates).

The administration of 401k plans is also driven by the set of services that plan sponsors provide as conveniences to their employees or as inducements to increased participation. Some of these services are the participant's ability to obtain a loan from the plan, daily valuation of account balances, education and the communication of information about the plan, the ability to transfer assets among investment options frequently, and call centers. Larger plans can provide these services at relatively low per-capita costs, but for smaller plans they can be very expensive (Stone).

HOW ARE 401k PLAN SERVICES DELIVERED?

Plan sponsors have adopted a variety of arrangements to provide 401k plan services to their employees. The service delivery mechanisms they select may potentially affect the level of plan expenses, the extent to which they are charged to the plan, and the degree to which they are disclosed to sponsors and participants.

FULL SERVICE PROVIDERS

The first type of providers are the full service providers. These are the "bundled" service providers that are able to provide the entire range of administrative services to a plan sponsor. Full service providers include mutual fund companies, larger banks and insurance companies. In one estimate there are just over 200 full service providers available to plan sponsors (Valletta, February 1997). However, they must control a large segment of the market, since in a recent survey, it was estimated that 59% of 401k plans use bundled services from full service providers (Spencer & Associates). This study revealed that the full service providers are mutual funds (50.4%), banks (24.4%), insurance companies (14.1%), consultant/TPA alliances (8.1%), and others (3.0%).

Relying on one full service provider to furnish all services to the plan appears to be the most common approach to 401k plan administration. Administrative expenses are revealed to the extent that they are invoiced to the plan sponsors. When any of those expenses are paid by the plan, they are recorded on the Form 5500 report and borne by the participants. In most cases, however, at least some of the fees are not reported directly but are netted in the annual performance results of the investments. In this case they are also borne by the plan participants. Bundled services are more prevalent among small and medium sized plans. According to one study, among plans with fewer than 250 participants, 85% rely on bundled services; among plans with from 250-1,000 participants, about 75% use this product (Fink). A smaller scale survey in 1996 estimated the percentage of plans using bundled services to be 59% (Spencer & Associates). (The latter survey may have been biased toward larger plans; the number of respondents was only 298.)

ALLIANCES

A smaller group of plans have taken an intermediate approach, receiving asset management and recordkeeping services from an alliance, while providing other services with in-house staff or independent providers. Spencer & Associates report that 6.1% of respondents to their survey use this approach. Another arrangement of this type would be one in which an ostensibly full-service provider out-sources the recordkeeping tasks, allocating 15-20 basis points from the investment management fee or expense ratio for this service (Rowland).

UNBUNDLED SERVICE PROVIDERS

Plan sponsors may provide services through a combination of in-house staff and independent service providers. In this approach the plan sponsor becomes the "bundler." This practice appears to be more prevalent among the larger plans that have adequate resources to manage such a plan (Tiemann). One study suggests that about one-third of plans (30.1%) use the unbundled approach with a combination of in-house and vendor resources (Spencer & Associates). An additional 5% provide services to the plan with in-house staff alone.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.tpa401k.com.

ACCESS TO 401k SERVICE PROVIDERS

The costs of 401k plan services are somewhat dependent on the information that a plan sponsor has about the range of prices in the marketplace that are charged by these providers. A search of the literature shows that gaining visibility of the universe of thousands of service providers would be difficult to impossible for any plan sponsor with limited resources. For example, Valletta (February 1997) estimates that there are in excess of 1500 third party administrators and over 3,000 firms offering asset management services to 401k plans.

The directories cited offer only a small segment of the available vendors, although the majority of the larger providers are displayed. For example, the 401k Provider Directory, one of the best known, only contains information about the 94 of the larger full service providers (HR Investment Consultants). The other directory located in the literature search, the (k)form Catalog, contains information about both full service providers as well as TPAs and alliances. However, the (k)form Catalog lists only 79 such providers. (The publisher states that these 79 providers service over 50% of 401k plans in the country.)

Information about service providers is also available from associations, advertising, and the Internet. In addition, the 401k plan provider industry is very aggressively seeking to make their services known, frequently through well structured sales networks. However, the plan sponsor relying solely on information furnished by those service providers that establish contact through a sales force, would have incomplete knowledge of the marketplace.

The foregoing discussion suggests that the market for 401k plan services is not particularly efficient for the plans that do not have the resources or interest to search for information that would allow a comparison of available services and prices.

401k Fact To Consider:

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.


401(k)plans

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