I am currently analyzing the feasibility of changing our 401(k) vendo

[Guest Nicolas Correa]

I am currently analyzing the feasibility of changing our 401(k) vendor. With respect to vendor solicitations, including broker sponsored introductions, what are some of the top questions/priorities/concerns you have when meeting with prospective 401(k) vendors? Have you implemented the Plan via a broker, or independent negotiations? Why have you changed 401(k) vendors? Can you also share your employers match methodology, including vesting and deposit cycle.

[Guest boberlander]

The questions and priorities you should ask about are the ones that the employer and employees are concerned about. What is it about your current plan that you would like changed? What is the impetus for your desire to change?

Cost? Service? Product capabilities? Plan Design?

[Jon Chambers]

Here are a series of questions that the DOL's ERISA Advisory Committee suggests that should be asked:

A. ISSUES FOR FIDUCIARIES WHO ARE HIRING A SERVICE PROVIDER

1) What service or expertise does the plan need? Is the service or expertise necessary and/or appropriate for the functioning of the plan?

2) Does this service provider propose to provide the service that is necessary or appropriate for the plan?

3) Does this service provider have the objective qualifications to properly provide the service that is necessary and/or appropriate for the plan? Generally, the fiduciary should seek the following information that will vary with the type of service provider being retained:

n business structure of the candidate

n size of staff

n identification of individual who will handle the plan's account

n education

n professional certifications

n relevant training

n relevant experience

n performance record

n references

n professional registrations, if applicable

n technical capabilities

n financial condition and capitalization

n insurance/bonding

n enforcement actions; litigation

n termination by other clients and the reasons

4) Are the service provider's fees reasonable when compared to industry standards in view of the services to be performed, the provider’s qualifications and the scope of the service provider's responsibility?

5) Does the plan have a conflict of interest policy that governs business and personal relationships between fiduciaries and service providers and among service providers? Does the plan require disclosure of relationships, compensation and gifts between fiduciaries and service providers and among service providers?

6) Does a written agreement document the services to be performed and the related costs?

B. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT MANAGER

1) Does the Plan have a Statement of Investment Policy? Some or all of the following issues may be addressed by a Statement of Investment Policy: (See Department of Labor Interpretive Bulletin 94-2.)

n Evaluation of the specific needs of the plan and its participants

n Statement of investment objectives and goals

n Standards of investment performance/benchmarks

n Classes of investment authorized

n Styles of investment authorized

n Diversification of portfolio among classes of investment, among investment styles and within classes of investment

n Restrictions on investments

n Directed brokerage

n Proxy voting

n Standards for reports by investment managers and investment consultants on performance, commission activity, turnover, proxy voting, compliance with investment guidelines

n Policies and procedures for the hiring of an investment manager

n Disclosure of actual and potential conflicts of interest

2) What is the position to be filled? Why is the Plan hiring an additional investment manager? Is the Plan replacing a terminated manager with a manager of the same investment style or hiring an additional manager with a different investment style? Is the hiring of this manager consistent with the Statement of Investment Policy?

3) Does the Investment Manager have the objective qualifications for the position being filled? (See questions concerning qualifications above.) Does the candidate qualify as an investment manager pursuant to ERISA section 3(38)?

4) How does the investment manager manage money? What is the manager's performance record and how does the manager achieve his performance? What are the risks of the investment manager's style and strategy compared to other styles and strategies? Do you understand what the manager does and the risks involved? Is this risk level acceptable in view of the return? How do this manager's investment style and strategy fit into the portfolio as a whole? (See Department of Labor Regulation 29 CFR 2550.404a.1, Investment Duties, and letter from Olena Berg, Assistant Secretary for Pension and Welfare Benefits Administration, to Honorable Eugene A. Ludwig, Comptroller of the Currency concerning the Department of Labor's views with respect to the utilization of derivatives in the portfolio of pension plans subject to the Employee Retirement Income Security Act.)

5) How does the investment manager measure and report performance? Does the process ensure objective reporting?

6) Is the investment manager a qualified professional asset manager? What is the investment manager's process to comply with the prohibited transactions provisions of ERISA?

7) What is the investment manager's process to insure compliance with the plan's investment policy and guidelines?

8) What is the investment manager's record with respect to turnover of personnel?

9) Has the manager's investment style been consistent?

10) Has the investment manager been terminated by plan clients within a relevant time period and why?

11) Has the ownership of the investment manager changed within a relevant time period and how will this affect the ability of the manager to perform the services needed by the plan?

12) What are the investment manager's fees? Are the fees reasonable in comparison with industry standards for the type and size of the investment portfolio? Does the fee structure encourage undue risk taking by the investment manager?

13) Does the investment manager have a personal or business relationship with any of the plan fiduciaries, or with another service provider recommending the investment manager? If a relationship does exist, how does it impact on the evaluation of the objective qualifications of the investment manager and the recommendation?

14) If the plan has adopted a directed brokerage arrangement with a broker affiliated with the plan's investment consultant, how does the investment manager determine when to use broker affiliated with the investment consultant? What are the per share transaction costs?

15) Does the investment manager have insurance which would permit recovery by the plan in the event of a breach of fiduciary duty-by the investment manager? What is the amount of the insurance? Who is the insurance carrier?

C. ADDITIONAL ISSUES WHEN HIRING AN INVESTMENT CONSULTANT.

1) What is the role of the investment consultant? Are the investment consultant's duties clearly stated in the Statement of Investment Policy and/or the contract with the Investment Consultant?

2) Does the Investment Consultant:

n Monitor and advise concerning asset allocation

n Monitor and advise concerning riskiness of investment strategies, styles and individual investment managers

n Monitor and advise concerning the performance and riskiness of Investments under the direct investment control of the fiduciaries

n Monitor and advise concerning the compliance of the investment managers and direct investments with the Statement of Investment Policy and Investment Guidelines

n Accept fiduciary responsibility in writing for all or some of the services it performs? Does the contract state specifically for which services the consultant accepts fiduciary responsibility?

3) Is the investment consultant's fee reasonable when compared to industry standards in view of the services to be performed and the scope of the consultant's fiduciary responsibility?

4) What are the investment consultant's performance measurement process and techniques including the performance data base used to evaluate the investment manager's performance? Do you understand the process? Are these processes and techniques appropriate?

5) Does the investment consultant have a personal or business relationship with any of the plan fiduciaries, or with one or more investment managers? Does the consultant receive compensation from investment managers either through the sale of services or through directed brokerage arrangements? If a relationship does exist, how does it impact on the evaluation of the consultant's recommendation of the investment manager?

6) What investment managers were recommended by the investment consultant in recent searches for other clients?

7) Does the investment consultant have insurance which would permit recovery by the plan in the event of a breach of fiduciary duty by the investment consultant? What is the amount of the insurance? Who is the insurance carrier?

D. ADDITIONAL ISSUES WHEN HIRING A BUNDLED SERVICE PROVIDER

1) Is the bundled service provider financially stable and committed to the defined contribution business for the long term?

2) What is the bundled service provider's track record for delivering accurate and timely record keeping, and other administrative services, and insuring regulatory compliance?.

3) Does the bundled service provider offer a wide range of investment options that will allow participants to make appropriate asset allocation decisions and achieve their investment objectives?

4) Has the bundled service provider demonstrated the ability to generate superior investment performance over time?

5) Does the bundled service provider have the administrative capability to provide assistance with employee enrollment, investment education and ongoing plan communication?

6) Does the bundled service provider have knowledgeable and dependable service representatives available to consult with plan participants?

7) Has the plan sponsor been provided with advance written disclosure indicating the expenses and commissions, if any, that the bundled service provider will receive?

8) Are the bundled service provider's expenses reasonable in relation to the level of services provided?

9) Has the plan sponsor received sufficient information to make a true comparison of the services provided by the various bundled service arrangements available to select from?

10) What procedures or mechanisms are in place to assure that any mistakes that may be made by the bundled service provider will be disclosed to the plan sponsor and corrected?

11) Does the plan sponsor understand its role in monitoring the bundled service provider?

12) Has the bundled service provider disclosed in writing the capacity in which it is acting, and has the plan fiduciary acknowledged its understanding of this role?

13) Has the bundled service provider disclosed any potential conflicts of interests?

Hope this helps.

[Guest TerminatedPPA]

You might want to ask about "revenue sharing" from the mutual fund families and what is done with these funds. Revenue sharing is legal "payments" from mutual funds back to a company for placing a block of business with them. These payments can range from 0% - .50% or more

Revenue Sharing Defined

Revenue sharing is the allowance of payment of some portion of the fees associated with an investment product to a party other than the investor or the investment product manufacturer.

Such allowance may or may not be known to a plan sponsor. It's important to emphasize that the practice of revenue sharing discussed here is legitimate and legal. The aim here is to heighten readers' awareness of the existence of revenue sharing by providing practical and useful information about qualified retirement plans and their management to help ensure that appropriate fees are paid to the individuals and firms providing services to a plan.

12-b1 And Subtransfer Agency

Revenue sharing can take many forms. A common means of revenue sharing in the mutual fund industry is the use of 12-b1 fees and subtransfer agency agreements. 12-b1 fees have long been a part of the industry, and traditionally have been included as part of a mutual fund's expense associated with marketing and distribution. These fees can range from 0.15 percent to 0.75 percent, and are assessed the way all other expenses in a mutual fund are assessed. This means they are a continuing fee, and they affect the investment performance of a fund by the amount of the fee. Usually, such fees are designated compensation for a broker/dealer in exchange for sales and customer services.

Another common method of revenue sharing between investment management firms and other service providers to retirement or savings plan is an agreement known as a subtransfer agent agreement. Briefly, such agreements are contractual arrangements between investment managers and other service providers that specify a payment from the investment management firm to the service provider in exchange for specified services. Such arrangements legitimately compensate service providers, and in so doing are an incentive for distribution of investment product through the service provider.

More important than the details of 12-b1 or subtransfer agent agreements is that the existence of revenue sharing mechanisms may create opportunities for plan sponsors to reduce expenses without reducing services or to increase services without increasing fees. Investment management firms have created the opportunities through their innovative revenue sharing mechanisms. Your job is to make revenue sharing benefit your plan.

[Jon Chambers]

In my opinion, revenue sharing is just a way to shift fees to participants, when those fees could have been paid by participants anyway. In most cases, you could find a low cost fund that would provide better expected returns than the revenue share fund, pay plan expenses from plan assets as a direct charge, and come out better off than if you had used the revenue share fund. And 12b-1 fees aren't capped at 0.75%--I've seen plenty at 1.00%, and some may be higher still.

Revenue sharing introduces a host of fiduciary and disclosure issues that are typically not well understood by most plan sponsors (or by most providers for that matter). In 1997, the DOL issued two Advisory Opinion letters, 97-15A ("Frost") and 97-15B ("Aetna") outlining when these revenue sharing arrangements might become prohibited transactions, and what disclosure was required to avoid PT concerns. I've seen numerous revenue share programs; very few meet the standards outlined in the Advisory Opinion letters.

In general, I suggest that sponsors should keep revenue share to a minimum--the problem is that as assets increase, any fee expressed as a percent of assets also increases, and before long, the cost may lose all relationship to the service provided.

[david rigby]

OK, Jon Chambers wins the prize for the longest message!

[Jon Chambers]

OK pax, I did copy from the following website:

http://www.dol.gov/dol/pwba/public/adcoun/srvpro.htm

but the cited stuff, which was relevant to the question, is buried in the text. You caught me!