This is the second part of a two-part series. This month’s article features insurance companies and banks. Last month, we featured investment firms and alliance partners.
Despite the hassles employers that switch 401(k) plans inevitably face, an estimated 15 to 20 percent take the plunge every year.
It is not masochism that drives the decision. Often technology plays a role, including the threat of the ubiquitous Y2K bug. “Employers want to know if their service provider can handle Y2K in their records,” says David Wray, president of the Profit Sharing/401(k) Council of America, in Chicago.
But the trauma of confronting the new millennium is not the only reason companies decide to switch. Mergers and acquisitions among plan sponsors, consolidation in the 401(k) vendor market, and a desire for daily account valuation are key catalysts for switching providers, notes Pat Pou, a principal at benefits consulting firm William M. Mercer Inc. in Los Angeles.
The good news for companies that sponsor 401(k) plans is that competition among vendors is growing fiercer. About 98 percent of employers in the larger end of the market (5,000-plus participants) already have 401(k)s, therefore “it’s a takeover business,” says Peter Starr, a consultant with Cerulli & Associates, a management consulting/research firm in Boston.
The competition means many sponsors can improve the terms of their plans by making a change. They often buy improved participant services for the same or even lower cost. They can expand fund options, add brokerage windows, and offer daily valuation. Thanks to the roaring stock market, some employers even qualify for cut-rate administration fees because the provider earns a bundle on asset management.
The bad news is there are fewer plan providers to choose from. If you haven’t ventured out into the marketplace lately, you may be surprised by what you see. Some recordkeepers left the business rather than invest heavily in Y2K compliance. Other recordkeepers, such as Watson Wyatt Worldwide, decided to stick to consulting rather than compete against the largest providers, like Fidelity Investments, Vanguard Group, and State Street Global Advisors. Together, this threesome managed 37.6 percent of 401(k) assets in 1997, up from 31 percent in 1996, according to Cerulli.
Obviously, mammoth providers can spread their costs over a wider user and asset base. “Often, the investment management fees subsidize the record-keeping function,” Starr says. For plans with 1,000 or more lives, average recordkeeping costs have dropped from 0.17 percent of assets in 1995 to 0.12 percent of assets in 1997, according to the Cerulli study. Investment fees have also declined, from 1.09 percent of assets in 1995 to 1.02 percent of assets through 1997.
Providers continue to try to distinguish themselves by offering more bells and whistles, such as Internet access and education. “As investment platforms get more open, there is less differentiation by investments,” Starr explains. “So, if you can’t differentiate yourself by investments, you try to differentiate by functionality.”
As more plans adopt these administrative accoutrements, the pressure increases for sponsors to offer them, too. To attract employees used to convenience, employers need to upgrade plan service, says Jerry Rigg, senior vice president and director of human resources for the investment bank Donaldson, Lufkin & Jenrette, in New York.