Walmartization of 401(k) Plans

[Locust]

Perhaps all of this is obvious, but I thought I'd post it to get some thoughts from those in the hinterlands.

There was a post on the 403(b) forum that lamented the fact that some school districts didn't get the benefit of a Vanguard or Fidelity for their teachers' 403(b) accounts. 403(b) vendors are protected by states and other governments, which are inherently conservative in choosing their vendors for political and other reasons.

But that's not the case with 401(k) plans (even governmental ones) that are moving quickly towards standardization and lower costs and arguably better services. The question is what has been lost in this process. I live in a city that used to have several bank trust departments that did 401(k) administration and there were several regional consulting firms, and these are now gone, absorbed into bigger banks and bigger national consultants. Colleagues have moved to Charlotte, Atlanta and Philadelphia. Who's left are financial advisors who pretty much provide the same services and make the same recommendations (and shift the technical work to those financial centers).

It's like Wal-Mart isn't it - a relentess move to a bigger distribution system with more uniformity and lower costs. It may be good for the participant, but you lose the regional flavor and the local expertise (which I guess wasn't really all that good). I assume that every 401(k) plan in every part of the country will be substantially similar provisions, so the main job of the local advisor will be to sell a fungible product.

[Guest Boilerburm1]

This looks like a great opportunity to sing the praises of the "unbundled" approach.

Many posters on this board, serving in the role of TPA, are in fact offering the local service you describe. By teaming with the "national" fund providers or mega-banks, the local TPA can provide expert advice in plan design, admin, and other plan level services, and can also team with a local broker who can use the national products to give top-rate participant level advice.

I see this as a great way for plan sponsors to structure their benefit plan services and retain the local flavor.

[Kevin C]

There are still some good regional TPA firms out there. I work for one of them. We also have a RIA company, so we do everything in-house. We are also a full service shop.

Bigger doesn't mean better and it doesn't necessarily mean less expensive. Most plan sponsors don't have a clue what they are really paying for their plans. OK, really it is what the participants are paying for the plan. Lately, we have been mainly taking over plans that are with national insurance companies. By the time you piece together what the sponsor pays and all the contract fees and investment management fees the participants are paying, it's usually significantly more than we charge and we are not known for low fees.

Then look at what some of the big firms won't do. How many plan sponsors do you know that are capable of determining plan eligibility and calculating contribution amounts? How about determining HCE's or reviewing and approving testing results? Most of the national firms we've seen require the client to do all that and spell in out in their contract that the client is responsible for everything. I've seen missed top heavy minimums, allocations to ineligible employees, incorrect allocations or none at all for eligible participants, incorrect testing and on and on. The national TPAs involved did not catch any of this because they didn't look at any of it. They just run what the client provides through their software and print out the results.

Being small doesn't automatically mean better either. The goal should be to find a good TPA, not a big one or a small one. Participants are better off when the Plan is adminstered correctly at a fully disclosed fee level that the plan sponsor determines is reasonable for the services provided.

I'll step off the soap box now.

[Bird]

I think the Walmartization, or commoditization, or whatever you want to call it, of the recordkeeping aspect of administration has been a great thing for our shop, a very small local/regional TPA firm. We have lots of options to tap into investment companies' recordkeeping systems, as well as systems of other companies that specialize in recordkeeping, so we can provide first-rate internet/800 access for participants and sponsors, while still doing what we do best, hands-on admin/consulting/compliance work.

[Kirk Maldonado]

I disagree completely with the proposition that larger vendors provide better service at lower costs. My experience has been that they provide a lower quality of service. I've seen this phenomenon for over 20 years.

[Locust]

I didn't mean to imply that local administration/investment services were inferior. I won't name names but clearly some large investment shops provide terrible administration. Clearly some national payroll firms are in the learning stages and are terrible. As a rule, the insurance companies are terrible. A good point has been made that local firms provide much better value than these. But that's the marketplace going with the better and cheaper alternative. Eventually, the competition will be between the big banks/mutual funds and the local (consolidating into regional) and then who will prevail?

It used to be that all the business was handled by local consultants and banks. Now only the smaller plans stay local. It used to be that every plan document was different - now everyone uses Corbel/Sungard/PPD (another example of consolidation). Standardization is good - it lowers costs and makes it easier to compare quality - but it also favors large distribution systems.

[Guest msladky]

Congress could change the landscape dramtically if they allow for employers to allow employees to choose to direct their elective deferrals where ever they desire (i.e., relief from ERISA and all that stuff for employers with regards to elective deferral investments). I do not think that type of change would be too good for the invesment advisory business but I am getting the feeling that plan sponsors are sick of trying to please everyone's personal investment objectives while at the same time avoiding getting sued by some scare mongering attorney firm becuase the mutual fund fees were too high or some nonsense like that.