by: Roxanne Fleszar
from:  Plan Sponsor Magazine
November 1999

Are you unhappy with your current 401(k) provider, but not quite sure what to do about it?

One sure tip-off that something is wrong is employee unrest. Since your participants are obviously the best judges of how well the company’s retirement plan fits their needs, always listen to, and respond accordingly to  their questions and concerns. Granted, this means having to deal with the few outspoken individuals who attempt to pass off their own personal interests as those of the majority. But consistently responding to employees with solid reasoning and an open mind will build trust in the plan, and create an open door policy from which you might get a few good suggestions.

If you cannot answer an employee’s questions, be honest, and then find someone who can. For instance, one plan sponsor was asked recently why the plan did not offer two specific funds. This participant’s wife’s plan offered funds that he thought were better options than his own plan made available. A consultant to the plan gave the plan sponsor the answer. Although the first fund had recently experienced great returns, the long-term record consistently underperformed that of the employee plan’s equivalent option. The second fund was simply closed to new investors. Rather than ignoring the employee’s concerns, the plan sponsor was able to leave the employee feeling satisfied and, thus, more apt to promote a positive attitude toward the plan among other employees.

The following are the 10 top reasons for replacing your plan’s current investment provider:

1. Poor administration is unnecessary and should not be tolerated. Examples of this include late participant reports, report errors, high account representative turnover, non-responsiveness or inaccurate responses to questions and concerns, and testing failures. If attempts to resolve these issues directly with the provider yield no results, then it does not deserve your business. To reduce the chance of encountering these same problems with a new provider, ask lots of questions and always check references.                                              
2. Too many changes in portfolio managers. Since a good manager usually produces consistent better-than-average performance results, a change in this function may not yield the same results. This may occur if the new person is unaccustomed to managing the type of fund at hand, or has a different management style than her predecessor.      

Additionally, high manager turnover may signal internal problems within the investment provider.

3. Changes to an investment’s fundamental investment policies. Those annoying proxy votes are mailed to you for a reason. As the plan sponsor, it is your responsibility to vote on changes on your employees’ behalf. Failure to do so, and to keep up-to-date on fund changes, could result in an investment option remaining in the plan which no longer meets the plan’s goals.                                               
4. Increases in expense ratios. Providers should be able to give you a justifiable reason for any expense increases. If they cannot, say goodbye. Some providers, such as Vanguard, will lower their expenses as your assets grow. Make a point to ask about this when researching new providers.                                                                 
5. Underperformance of investments to benchmarks. It cannot be said enough times that plan sponsors should review investment options at least quarterly against appropriate benchmarks. Naturally, even the best fund can slip once in a while, but consistent underperformance against a peer group is a strong signal to replace that option. Neglect in this area can significantly hurt employees’ return potential and open up the plan to future liability.                                                                                                              
6. The investment offerings contain high securities overlap. For instance, a recent Kiplinger’s article mentioned the top five 401(k) fund options offered by a large U.S. provider. Each of these five funds held three of the same stocks in their top ten holdings, with four of the five funds holding all three stocks in their top five holdings.                                

One plan we know of that uses this investment provider offers employees the choice of one balanced fund plus three domestic equity funds. An employee choosing the balanced option plus one of the three domestic equity choices would have securities overlap of between two and six stocks in the top ten holdings, depending on their choice. Certainly this is not a desirable portfolio by diversification standards.

7. Insufficient fund diversification. The plan sponsor is responsible for offering employees a diverse selection of investment options across large and medium capitalization objectives, as well as small capitalization, bond, and international, categories. To do this effectively, plan sponsors must have provider access to multiple manager options from which to select complementary investment options for the plan (i.e., a mixture of funds which will accommodate diversity of both styles and securities).                                                                                       

Investment offerings must also provide style diversity, allowing employees to lower volatility by balancing their assets in a mix of growth and style-oriented investments. Providers offering investments from just one fund family are particularly susceptible to a lack of style diversification, as some fund families manage strictly (or heavily) as either growth or value-oriented managers.

8. Poor quality education programs. An experienced presenter, preferably an individual with a minimum of five years of related investment experience, who will be able to respond to a variety of participant questions, should conduct employee financial education programs. Program design should be customized to your employee demographics. As with account representatives, be wary of high turnover in education presenters. Lack of consistency erodes employee trust and makes it difficult to build upon previously covered topics.

9.      The provider does not offer asset allocation fund options. A             recent survey conducted by M&I Trust reports that plan participants           "are most likely to divide their contributions equally among the options            they have selected or to randomly guess at the appropriate asset             allocation." Since asset allocation is though to account for more than            90% of a portfolio’s performance variation, offering professionally            managed asset allocation funds can potentially make a significant             difference for employees who do not know how to structure                  contributions properly.      

10.     Lack of emphasis on meeting technological changes. As in                every industry, technology is quickly changing the face of the 401(k)               plan, and providers must keep up with these changes to meet the              demands of their clients. Although not every plan requires all the "bells              and whistles," if your plan wants or needs additional technology that              your provider cannot furnish, it is time to look elsewhere.