Chumming the 401(k) Waters
I have sympathy for the folks in HR. Basically their job seems to be to handle everything the boss has no idea idea what to do with – while they fill in for the receptionist, clean the lunch room and fix payroll problems at the same time.
So it probably shouldn’t surprise me when my plea to review the 401(k) plan withers and dies on the vine.
Here’s the problem that most people in HR are all to familiar with: Once they start chumming the shark invested water, by calling around about 401(k) options, they will be swarmed. The feeding frenzy will consist of overly aggressive salespeople calling, writing, trying to get an appointment and sucking up all of HR’s time.
The Lesser of Two Evils: So rather than chumming the water the boss and HR will decide to compromise. They will call the current agent or broker on the plan and ask to see a few alternatives. It’s not a great option because that current adviser has no real incentive to show the boss options that would truly lower the overall cost – and that advisers compensation. Without competition, the current adviser will not be pushed to provide better service. Think about it: If the adviser comes back and says “I can lower your cost and I will start being proactive” wouldn’t the next question be: “What have I been paying you for all these years?”
So we are back to square one: Chumming the 401(k) waters for outside proposals. Here a few ideas to help the folks in HR:
- Set the ground rules: Along the lies of: “I will call contact you – don’t call/email/mail me”. Failure to not follow the rules will result in immediate disqualification.
- Set proper expectations: When must the bids be submitted by? Will you then interview finalists? When will everyone be told who the winner is?
- Use the same assumptions: Every proposal must use the same number of plan participants, total plan value, expected future contributions, average account balance.
- Fee Transparency: Everyone must break the cost down for you the exact same way (using your form, not theirs). Cost includes TPA cost, investment expense ratios, other assets based (sometimes called wrap fees) fees and a detail of who gets what for compensation. Put that compensation is dollars and cents – not just a percentage. You have a right to know how everyone is paid.
- Service Standards: Who does what? What exactly is the adviser responsible for? How much do they get paid (see question 3) for that? What about the Third Party Administrator?
- Investments: With 20/20 hindsight everyone will show you great past performing investments. Instead focus on the process. Do you have both index and actively managed funds in each category? How are the funds chosen? When and why are they fired? One stipulation – don’t get buried in fund choices. Ask for the best 12 to 20 funds and why they are on the menu over other popular choices.