MJM Financial, LLC 401k Workshop Series

Transcription

1 MJM Financial, LLC 401k Workshop Series Successfully Managing the 401k RFP Process June, 2005

2 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

3 Changing the Emphasis 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.

4 The Current Provider Marketplace

5 The 401(k) Company 401k Easy ABN AMRO ADP AIG Valic American Express American Trust Ameritas Life Insurance Corp AMVESCAP AUL Retirement Services Bank of America BB&T BISYS Retirement Services BOK Financial CitiStreet Correll Co. DailyAccess Corp. Diversified Investment Advisors EPIC Advisors Federated Retirement Plan Services Fidelity Investments Sample Plan Providers Franklin Templeton Great-West Life The Hartford Hewitt Associates ICMA Retirement Corp ING Invesmart JP Morgan Retirement Plan Services Lincoln Financial Manulife Financial (Hancock) Marshall & IIsley Trust MassMutual McCready & Keene Mellon Merrill Lynch MetLife MFS Milliman USA Mutual of Omaha National City Bank Nationwide Financial The Newport Group New York Life Investment Mgmt Oppenheimer Funds Paychex PNC Advisors Principal Financial Group Prudential Putnam Investments Schwab Retirement Plan Services Scudder Securian Standard Insurance SunGard EBS Suntrust T. Rowe Price Transamerica U.S. Bank Union Bank of California The Vanguard Group Wachovia Wells Fargo Source: Plansponsor.com

6 Funny But True? 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

7 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

8 Steps in the RFP Process

9 Should You Hire a Consultant? Pros Cons 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 Make sure that the consultant is a consultant! Source: Plansponsor.com

10 Steps in the Process Define Needs & Objectives Step 1 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. Establish Criteria & Procedures Step 2 Set a realistic timeframe for vetting providers. Decide on which providers should participate and why. Establish evaluation criteria. Comparative Analysis Step 3 Score providers based upon replies and interviews. Distinguish the operational analysis from the investment analysis. Monitor Select& Implement Step 4 Implement standards, criteria and process for evaluating choices, both initially and on an ongoing basis, in light of plan and marketplace changes

11 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

12 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

13 Examples Plan Size Potential Providers Micro/Start-Up Small Hancock (Manulife) Great West ADP Principal Wells Fargo Newport Group/Matrix Mid-Size Vanguard T. Rowe Price Milliman/Schwab Large Fidelity Citi Street Hewitt

14 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

15 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?

16 Operational Expense Categories Loan Conversion Establishment of trustee link Conversion of participant records Transactional and Educational Website Plan Sponsor Website Trustee Fee Per Fund Fee Account Maintenance Per Participant Signature Ready 5500 Form 5500 Information Only Audit Support ADP/ACP Testing Coverage Testing Loan Setup Loan Maintenance Lump Sum Distributions In-kind Distributions Approval of Hardship Withdrawals Hardship Withdrawals In-service Distributions Installments Minimum Distributions Fund Transfers Approval of DROs QDROs Processing EFT Wire Transfer Fee Toll-free Voice Response System Toll-free Service Center Internet and Intranet Access Internet Customization Participant Statements Determining Eligibility Enrollment Confirmation Statements Retirement planning and modeling Investment advice available to participants Setup Investment advice available to participants - Ongoing On site employee meetings Administration manual Consulting on plan changes Programming plan changes Tax statements Ad hoc reports

17 Fee Elements $1500 per day plus costs Bps charge or flat $ per qtr. Trustees Participant Education Plan Sponsor Consultant or or $25 to $125 per head plus Bundled Vendor Cost of fund options plus 3 bps up to 12 bps Administration Record Keeping Investment Options Directed Trustee Custody $1500 to $7500 per year 35 bps up to 200 bps $1500 to $7500 Fees likely to be paid direct from plan assets Fees likely to be paid indirectly from plan assets

18 Investment & Fee Analysis

19 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.)

20 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

21 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?

22 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

23 Overall Fee Comparison Provider A Provider B Difference Annual recurring costs $ % $ % $ Investment Management $283, % $90, % $193,206 Trust, Custody & Trade Platform $0 0.00% $14, % ($14,414) Per Head Recordkeeping $0 0.00% $19, % ($19,710) Administration & Compliance Less Revenue Share Recapture Employee Education Investment Consultant (RIA) $0 0.00% $4,500 ($3,748) $7,500 $38, % -0.02% 0.04% 0.20% ($4,500) $3,748 ($7,500) ($38,437) Total Recurring Cost $283, % $171, % $112,392 Per Participant $ $ ($256.60) Non-recurring (ad hoc) costs Plan Conversion $0 $5,000 Loan Processing - Setup Loan Processing - Annual Maintenance $150 (one-time) $25 $75 (per loan) $0 Distributions (of any kind) Enrollment Kits Online Advice Hardship Withdrawal Processing $50 included included $75 $25 $5 per $20 per $75 QDRO Processing $75 $100 SDA - Setup SDA - Annual Participant Charge included $70 $50 $120 SDA - Online Cost per Trade $24.95 $19.95 Fee Guarantee 3 years 3 years

24 Selection

25 Understand the Distinct Functions Operational Investment Enrollment Communications Recordkeeping Administration & compliance Design & documentation Overall architecture Portfolio flexibility Portfolio structure Investment managers Financial instruments Remember, a 401k is an investment program that has specific operational requirements

26 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

27 Evaluation & Selection Categories Fidelity T. Rowe Principal Overall Investment Platform Asset Allocation Strategies Likelihood of Business Persistence Service Culture Name Brand (participant perspective) Educational Materials Plan Document Flexibility Technology Development Overall Expense (Cost) Service Agreement Local Presence Ad Hoc Reporting Education Delivery/Participant Services Total = Good 2=Better 3=Best

28 Service, Trust & Advisor Agreements

29 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 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?

30 Service, Trust, and Advisor Agreements 5. Venue, i.e., place where litigation over agreement will be held. 6. Arbitration. 7. Float income. 8. Liability caps. a. Binding? b. Venue? c. Who picks arbitrators? 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.

31 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?

32 Resources for Sponsors Fee disclosure worksheets Recordkeeping Surveys & Product information (401k buyers guide) Articles and other resources

33 Thank You