MAKE 2008 THE YEAR TO REVIEW YOUR 401(k)

Each year, thousands of companies go through weeks of strenuous reviews of their health insurance, working diligently to shed 20% increases in their rates.  Given the overall importance of the 401(k) to the organizations’ rank-and-file, the same diligence should be practiced.

Costs
One of the most important aspects of a review should be to examine the cost of the plan against the services being provided. Offering a plan with high costs can be a major disadvantage to participants building their retirement, especially when other, less-expensive alternatives are available. Frequently, 401(k) plan providers impose “asset charges” or “separate account charges,” which are added to the expense ratios of the plan’s mutual funds, resulting in overall expense ratios in the range 1.60% to 3.00%. The long-term impact from higher costs is significant: A 1% lower expense ratio could, due to the long-term effects of compounding, create a larger nest egg over time.

Typically, insurance company-based plans include asset charges in addition to the internal mutual fund expenses. Generally, mutual fund companies eliminate the additional asset charges but can restrict most or all of the fund choices to that company’s funds. “Open architecture” plan providers allow plan sponsors access to the funds of many mutual fund companies with no restrictions.

The plan sponsor must review the annual administrative costs for all support services, record-keeping, administration, and compliance testing, whether handled by the plan provider or a separate administrator. This “hard-dollar” cost is a direct plan expense of the company and an important part of an overall assessment of a plan.

Investments
Next, consider the importance of the quality of mutual funds. What if your current plan’s investments, rather than providing average returns, provided above average returns? If the overall performance of the plan can be improved by just one percent in returns, the result is significant over time. In addition to the expenses, a fund can be evaluated on a variety of parameters: relative returns, risk versus return, management tenure, holdings, style adherence, etc.

To be assured that a plan has access to high quality funds, plan sponsors may again want to consider open architecture plan providers.

Technological Changes
Changes in technology have made the 401(k) industry more cost-competitive, while providing a greater amount of information and control to plan sponsors and participants.
 

• Does the plan provide user-friendly telephone voice response systems and web-based interface for participants allowing them to review their portfolio and make changes to their investments free of charge?

• Does the participant site have web-based tools available to participants to help them determine how much money they will need in retirement and to offer guidance in developing their portfolios?

• The plan sponsor will have a web site for plan level information. Does this site have sophisticated means of querying the database directly to secure information on plan utilization and performance?

Another important area in plan technology is payroll interface. Many plans are cumbersome in accessing payroll data. Modern plans with updated technology interface directly with the payroll provider’s data with the plan sponsor having only to review the data prior to upload. The plan provider must be subject to the highest level of SAS 70, an industry–wide standard for data control and interface.

Service
The quality of service provided by the plan provider will influence whether the plan sponsor is pleased or annoyed when dealing with 401(k) matters. A plan providing excellent service can have a positive impact on the morale of finance, human resources, and 401(k) plan participants.

In evaluating a plan, a plan sponsor should look at all important aspects of the plan: costs, investments, technology, and service. While all are important, the most significant long-term gains will come from improvements in fund choices and plan participant level costs. When examined this way, the review of 401(k) plans and plan providers can pay off handsomely over the long run.

Freedom One pioneered the 401(k) Fiduciary Review, an expert third party analysis of your 401(k).  After successfully completing over 150 reviews we are so confident that this analysis will lower your costs, benchmark your company’s current plan, and immediately add value, that we guarantee its results.  To get your plan on course for success, click here