by: Roxanne Fleszar
from: 401kwire.com
Aug. 6, 1998

Companies considering implementing a qualified retirement plan or considering changing providers must first overcome the obstacle of comparing proposals. With a plethora of businesses entering the retirement plan provider arena, it is difficult -- sometimes impossible -- to find even two proposals which can be compared on an "apples-to-apples" basis.

Plan sponsors can and should demand easy-to-understand proposals which address key issues in order to make critical, comparable judgments between candidates. Such key points include fee structure, on-going support services, and net investment returns.

COMPARING FEES

When comparing proposals' fee structures, request a proposal with a defined series of questions, so you can receive information in your format for easier comparisons. I recently did this for a client who already had their minds set on a new provider. Once they saw the actual numbers in a corresponding format, they realized that the least expensive provider would be the most expensive if they received all of the services they desired.

Fees generally fall into two major categories:

implementation or takeover fees, and

annual maintenance fees.

The first is usually in the form of a flat fee or hourly charge, and compensates the provider for time spent instituting the plan (i.e. for meetings with plan sponsors and creating plan documents). If you are quoted an hourly charge, remember to request a quote on the number of hours anticipated to set-up your plan. Also be sure to confirm with each provider that this is the total one-time only set-up fee.

The annual maintenance fees are much more comprehensive. They include such items as the recordkeeping fees, investment management fees, and the Investment Advisor's fee.

What's important to know:

General maintenance fees may include an Annual Fee, which is generally quoted as a flat-fee, as well as a Participant Charge, which may be based on participants only, or on all eligible employees. Occasionally this may be based upon assets under management. Plan Sponsors may be surprised to find out that they must pay additional fees for such services as 5500 filings, compliance testing, and assistance.

Other fees that may be charged are loan initiation and maintenance fees, plan distribution fees, and employee education costs. Always ask for an explanation of each fee and how it is billed. It is important to understand what services the recordkeeper includes as part of the basic service.

The Investment Advisor's fee may be either a percentage of assets or commission-based. If the fee is asset based, obtain a copy of the advisor's fee schedule. Ask questions before agreeing to the IA fees.

- Will your fees increase or decrease as Plan assets grow? - What are the breakpoints?

- At what fee level is the Plan currently?

If no fee is disclosed in the proposal, this may be a sign of a commission-based fee structure, a common tool used by large providers to hide fees.

Finally, don't overlook the management fee on separate accounts and mutual funds. Don't hesitate to request an average fee based on each fund option being presented to your Plan.

Note: all investment performance numbers should be presented net of all fees for ease of comparison.

COMPARING SERVICES

Now that you have the fees all lined up, it's time to compare services.

Plan Sponsors should clearly understand the services they will receive and from whom.

Ask these questions:

Will your participants receive employee financial education? If so, in what form does it take (i.e., seminars, newsletters, etc.)?

What are the qualifications of the presenter(s)?

What is their investment experience?

Do they have professional credentials?

Is education on-going with the intent of increasing participant knowledge?

Do they build upon past investment topics?

Plan Sponsors should also ask if additional services are available that were not covered by the proposal. Many companies provide additional fee-for-service offerings, which may be perfectly suited to your Plan's needs. Examples include personalized asset allocation reports, or individual sessions with the investment advisor to discuss the Plan's options.

REVIEWING PROPOSALS

Pay attention to the nitty-gritty small details when you review proposals:

Are the investments proposed appropriate for your Plan?

How do their performance, risk levels, and expense ratios stack up against the offerings of other providers?

What criteria does the provider use for choosing investments?

Who is responsible for on-going monitoring of the funds, and making recommendations for change?

What reports will be provided to monitor performance and with what frequency will they be provided?

How much flexibility is provided for investment changes?

Does the provider/advisor implement an Investment Policy Statement?

Obviously, Plan Sponsors have their work cut out for them. Plan Sponsors who are going to do their own comparison should review and compare at least five proposals. However, if you are unsure of your ability to pose the right questions, or simply don’t have the time, consider hiring a consultant who preferably will present you with the top three proposals that meet your objectives.

For Plans who are seeking to convert to a new provider, compare your current provider against the new possibilities. If you are considering leaving to obtain additional services, you may first wish to discuss this with the current provider as they may be planning to upgrade in the near future. Alternately, if it is a fee-based decision, a comparison may supply you with a bargaining tool for negotiating lower fees without the need to transfer assets to a new company.

Roxanne Fleszar is the principal of Financial Resources Management Corporation, Peabody, Mass., providing comprehensive investment advice and financial education, for corporations, and high net worth individuals. She recently spoke on 401(k) issues before the Investment Company Institute mid-winter meeting, the premiere gathering of the mutual fund industry in the U.S. She can be reached at 978-531-0954.