Mark provided insight into the retirement plan industry in a roundtable discussion quoted heavily in a cover story for Pension Management Magazine. Following are excerpts from the published comments.
Q: What do you see as the most critical issue in 401(k) plan design / administration?
MT: In the middle market, 401(k) plan sponsors and participants increasingly are focusing on investment yields. Consequently, there is pressure on plan sponsors to offer participants a diverse set of investment alternatives including top funds from multiple-fund families.
Nevertheless, the most important part of a 401(k) plan still is the company match and/or other company contributions. To participants, the true measure of a plan's value is what the company is kicking in. Plans are distinguished from one another by company contribution as a percentage of total pay. Regardless of how many investment options are offered, if Company A is contributing twice as much as Company B, Company A's plan is the one participants would rather have.
Q: More and more companies are outsourcing their 401(k) plan administration. What impact is that having on plan design? Can you comment on the bundled vs. unbundled approach?
MT: Companies typically outsource their 401(k) administration to take advantage of the savings and features offered by providers who have invested their own capital in state-of-the-art technology. But as more companies take advantage of the bundled providers, they are finding that they often are limited in overall plan design flexibility by fund lineups stacked with proprietary funds and prototype documents.
The disciplines involved in the operation of a plan - investment management, trust services (custody, payment of benefits, remittance of taxes, preparation of statements), recordkeeping services and consulting services - are handled by different individuals with different expertise, whether under a bundled or unbundled arrangement. An electronically connected alliance is not significantly different from a bundled single corporation program and may offer added investment flexibility.
Q: On ERISA Section 404(c): Is the decision to comply with Sec. 404(c) still an issue or are most plans complying? What are reasons given for not complying? What are the most common changes sponsors have had to make in their plans to bring them into compliance with 404(c)? Does 404(c) compliance make plan sponsors feel safe from future liability?
MT: All of my accounts are complying with 404(c), but they still have all of their fiduciary responsibilities. All they have done is reduce their exposure in case an employee sues them because of disappointing fund performance.
Q: How do you judge the effectiveness of your recordkeeper? What problems do you look for, and how do you avoid them when changing recordkeepers?
MT: Accuracy and timeliness are required, and they are the starting point. Recordkeeping firms are distinguished by the trust they garner from their customers, and that is affected positively by continuity of representatives.
Q: How can plan sponsors get a handle on what their plan really costs (and how can they write RFPs that will give them true apples-to-apples comparisons)?
MT: The question is indicative of the industry's confusion about 401(k) products and their "true costs" to plan sponsors. It is in a company's best interest to ask consistent questions and demand that all costs be disclosed at the outset during the RFP process. That is the only way they can get true apples-to-apples comparisons. It also is helpful to project participation and asset assumptions out for five years and ask for projected costs.
Q: Is the small-plan market still the hot growth are is 401(k)s? Why or why not?
MT: Absolutely, because the larger market is saturated. The company that is able to put together a program that appropriately addresses the concerns and needs of small-plan sponsors will find plenty of business. A perfect program is yet to be developed. Small plan products from bundled providers compel plan sponsors to fit themselves into a prototype program, which many sponsors feel is too inhibiting. However, companies that offer too many choices to plan sponsors find they cannot provide cost-effective administration. Finding the right balance is one challenge facing financial services, consulting and TPA firms.
Q: Regarding investment options, it now seems clear that the plan sponsor's fiduciary responsibility goes beyond selecting appropriate options for the plan. The sponsor also must monitor those options and make changes when necessary. In practical application, what does that mean? If the plan uses "brand-name" mutual funds and they suffer from market shifts, is the sponsor protected?
MT: This is nothing new. The use of brand-name mutual funds certainly is not full protection. Brand names can be poor performers, expensive and/or unattractively risky and suffer more style drift than institutional investments. There can be failure of sufficient spread of funds. We recommend a formal review process that provides objective analysis and measures performance against established goals.
Q: Has the industry begun to identify and "optimum" number of investment options in a 401(k) plan - or is that still an open question? If there is an optimum number, what is it?
MT: There is not a single optimum number of investment options. It depends on the group, but my answer usually would be in the twelve-to-eighteen range, counting a suite of age-based asset allocation funds as one.
Q: What types of investment options are 401(k) plans offering now that they weren't offering three years ago?
MT: Real estate funds are common in the smaller and middle-sized plan marketplace and they were not three years ago.