by: Julie Ann Maggio
from: Plan Sponsor Magazine
October, 1998
When Boston-based Inc. Magazine wanted to revamp its 175 participants' $16 million profit-sharing plan, it turned to Roxanne Fleszar, a Certified Financial Planner and Chartered Financial Consultant in Peabody, Massachusetts. It would have been easy for John Reardon, Inc.'s chief financial officer, to hire a large-name consulting firm, but instead, he chose Fleszar's five-person Financial Resources Management Corporation.
A similar scenario unfolded when WKK Corporation, the world's largest zipper manufacturer, found out that its 401(k) provider, Nationsbank, was exiting the defined contribution business. The Macon, Georgia-based company's investment committee immediately started searching for a new provider for its 1,000 participant, $20 million 401(k) plan. But navigating the provider marketplace alone was no easy feat. So the investment committee hired independent retirement plan consultant Trisha Brambley, head of her own firm, Resources for Retirement Plans in Newtown, Pennsylvania, to guide it through the vendor RFP and selection process.
Both Inc. and WKK turned to small, regional consultants selling an increasingly popular product: personalized defined contribution plan expertise. Inc.'s CFO says he chose Fleszar "because of her extensive knowledge of the 401(k) business and her experience in managing investments for high net-worth individuals. We were confident that she could give us the best advice." Fleszar has helped Inc. develop a new investment policy for its profit-sharing plan, change its investment options, track investment performance on a regular basis, and help participants with financial and investment education. WKK compensation and benefits manager Jerry Peyton has a similar story to tell: "We value the personalized service and guidance we get from Trisha Brambley," he says. "We could have placed our business with a large, expensive consulting firm, but then we would have had to work with different people within the consulting organization's management structure, and probably never get to know who was actually doing the work for our account. With Trisha, we know she is personally handling our business."
Peyton's decision to hire a specialist like Brambley and to forego traditional consulting choices is now increasingly characteristic of the defined contribution decision-making process, particularly among mid-sized plans. The growth of 401(k) assets in particular is one reason that plan sponsors are seeking out firms that are able to offer this brand of specialized, comprehensive, and independent advice. By the end of 1997, 401(k) assets per participant had increased some 25% over the prior year to an average account balance of $95,000., according to the 401(k)/Profit Sharing Council of America. The figure was an eye-opening 200% over PSCA's 1990 survey findings.
So it is no surprise that plan sponsors are witnessing the mushrooming of small, focused and extremely knowledgeable consultants who can help employers to take their 401(k) plans into the 21st century. Some of these consultants will even go so far as to take part in structuring plan investments and wearing the hat of fiduciary.
New Day Dawns
All of this speaks to a huge upheaval in the pensions community. Until
recently, plan sponsors had two principal sources for advice on their 401(k) plans:
either large, traditional defined benefits consultants, or independent
broker-dealers. Those times are over. Broker-dealers were often ill-equipped
to deal with the fiduciary ins and outs of advising 401(k) sponsors. Large
traditional investment consultants have been slow to focus attention and resources on a
non-core business, and in some cases prefer to stick to their defined benefit knitting.
What better time for smaller, more focused and more streamlined consulting operations to go after the 401(k) sponsor with more flexible and generally more affordable fees? Independent consultants' hourly fees can range anywhere from $60 to $300 per hour, depending on the services required. Most independent consultants also are willing to work on a fee-for-project basis. This pricing flexibility is one major reason that middle market plan sponsors can now afford top-notch consulting talent.
Middle-market plan sponsors - variously defined - but broadly with assets between $30 million and $100 million - tend not to be large enough to pay high retainer fees to a full-service investment consulting firm. They have become more aware of fiduciary issues and more demanding overall. "Most middle market plan sponsors have their plans with bundled providers, where they get boilerplate service," says Rank Bermani, executive director of the Society for Plan Sponsors, a professional association for corporate pension decisionmakers. But this is changing as more mid-sized employers are leaning towards smaller, independent shops able to give them the kind of stand-alone consulting and customized services that up until now have been largely out of their reach, Bermani notes.
The new wealth of defined contribution-focused providers is a function of fresh supply as well as new demand. Robert Wuelfing, head of Simsbury, Connecticut-based pensions analyst RG Wuelfing, notes that many of the new independent consultants were casualties of the widespread downsizing and consolidation that has occurred among benefits consultants within the last five years. "Some of these consultants have decided to start their own businesses," says Wuelfing, "and for others independent consulting is a temporary stage while they are looking for other opportunities. In all, there is definitely more expertise available in the marketplace."
The fast-changing dynamics of the defined contribution marketplace have also altered the consultant's role. Until very recently, bundled service providers led by the giant mutual fund complexes were able to dominate the middle market with standardized 401(k) product offerings which left sponsors little room to maneuver. But in recent years, defined contribution plans have grown more complex with government oversight growing and participants demanding more investment choices. Plan sponsors across the board have come to realize they need more specialized advice and guidance that is independent of the source of investment products. Moreover, rising bundled fees to manage assets and provide plan services have plan sponsors and participants wondering just how cost-effective their bundled 401(k) plans really are. "Bundled providers use complex pricing models when determining their fees," says the Society for Plan Sponsors' Bermani. "It is very difficult for plan sponsors on their own to break down a per-head fee and understand the cost components." The new wave 401(k) advisor should be glad to oblige.
"In today's competitive environment, plan sponsors have specific issues that are not being addressed - nor should they be addressed - by bundled service providers," says John Nelson, Plan Sponsor's Defined Contribution Consultant of the Year. "Bundled providers are similar to factories because they take an assembly-line approach to providing plan services. They do a great job at routine processing and procedures, such as recordkeeping and preparing employee communication materials. But providing specialized legal advice to the plan sponsor and technical guidance on plan management are not their specialties. Plan sponsors' needs in these areas often go beyond the scope of what a bundled provider can offer," says Nelson. The time is right, he adds, for independent firms such as his to help plan sponsors address the growing complexities of 401(k) plan management.
Corporate treasurers and chief financial officers, both traditional users of consultants, have not overlooked these changes.
Treasury gets involved
Until recently, the responsibility for 401(k) plan management and administration
tended to reside with the human resources department, but the growth of defined
contribution assets over the last decade has led to increased oversight for treasury
departments. This has brought about a growing institutionalization and more
professional management of defined contribution plans, observes Ruth Hughes-Guden, who
headed up the defined contribution consulting practice at Darien, Connecticut-based
RogersCasey until 1996 when she joined Morgan Stanley Asset Management as a principal and
had of the firm's defined contribution practice.
"Historically treasury departments at large companies regarded defined contribution plans as secondary retirement vehicles. But the surge in 401(k) assets has prompted them to pay closer attention to the investment options currently being offered in these plans, how participants are investing, and how the investments are performing with respect to established benchmarks," says Hughes-Guden. "Essentially, plan sponsors are beginning to apply defined benefit investment and management concepts to defined contribution plans."
The developments have spawned a new breed of consultant - each with its own unique approach. Take Strategic Financial Concepts, a retirement consulting and financial planning firm based in Clarendon Hills, Illinois. The firm was founded in July 1998 by four partners including Carl Londe, formerly a senior benefits consultant with Watson Wyatt. SFC intends to provide what Londe says is a solution to two major challenges plan sponsors face: how to increase participation levels and how to get participants to invest more efficiently. "Our approach involves using participant demographic and plan data obtained from the plan sponsor and their plan providers, to construct customized portfolios for participants into which they will be placed, once they decide not to actively manage their own investments, " he says.
Londe is among those new-breed consultants who are welcoming the fiduciary role. He believes that the market for SFC's services is some 1,000 plans with assets ranging from $100 million into the multi-billions. "By managing the election process and taking on fiduciary liability by managing the assets, the proportion of 401(k) assets that are invested efficiently will skyrocket," claims Londe.
For Roxanne Fleszar, founder of Financial Resources Management Corporation, years of providing advice and asset management services to high net-worth individuals led her to begin advising employers on their retirement programs. Fleszar works with employers who are based in the Northeast and whose plan assets are in the $20 million range. In her work with these companies, Fleszar sees a recurring problem: Many companies and their participants do now know how to properly evaluate their plans. "Too many plan sponsors and participants do no know how their plan's design, investment options and performance compare with other plans in the marketplace, nor do they know how their selected fund options compare with other funds," she says. "Consequently, many of the investment options offered in these plans underperform their benchmarks."
Fleszar also focuses on participant investment education. "The plan exists for the benefit of participants, and employers are not doing all they should to help them," she says. "The average participant does not understand asset allocation and other aspects of their plan to make informed investment decisions. Plan sponsors have an obligation to make sure that plan participants' hard-earned money works as hard as it should. My role is to advise and educate both plan sponsor and participant about their plan and to guide them through the appropriate steps that will help them meet their goals."
Fleszar is both a Certified Financial Planner and a Chartered Financial Consultant and is thus precisely the type of consultant qualified to provide investment advice and manage assets. Fleszar will also assume a fiduciary role in situation where she manages plan assets.
Not all of these defined contribution boutiques are either new or small, however. Louis Kravitz started his actuarial consulting and recordkeeping firm - Louis Kravitz & Associates, based in Encino, California - in 1977, and specializes in the design and administration of small to mid-sized retirement plans. His firm has 55 employees and is actually "the largest locally-based actuarial consulting firm in southern California," says Kravitz. His company specializes in designing qualified plans for small businesses, and the firm has pioneered a plan design feature that is finding particular favor among closely-held businesses or partnerships. The approach, known as "new comparability" addresses 401(k) plans with a profit-sharing component. It is designed to allow company contributions of up to $30,000. for owners and other key employees - who are usually highly compensated - without raising company contribution levels for non-owners or rank-and-file workers.
"The defined contribution market for services for small and medium-sized plans is growing rapidly," says Scott Salisbury, president and co-founder of Actuarial Consultants, which is based in Torrance, California and is a member company of Strategic Benefits Group. Salisbury knows that the bundled 401(k) product for this market is viewed as a commodity and is often sold as such. "It is one of the reasons that we do not take a turnkey approach to designing benefit plans," says Salisbury. He notes that many clients initially hire ACI expecting a turnkey plan, but that once they discuss their goals and options find that they want a more sophisticated plan tailored to their own objectives. "One of the most common requests is to establish a plan that offers all the advantages of a 401(k) to the rank-and-file employees, while allowing highly-compensated employees to maximize their deferrals," says Salisbury. The majority of his clients' plans have 150 to 200 participants, while the largest holds approximately $50 million in plan assets.
Resources for Retirement's Trisha Brambley, formerly a defined contribution consultant with Johnson Companies, now part of Sedgwick Noble Lowndes, started her defined consulting business on a part-time basis in 1993, gradually turning full-time in 1995. Brambley knows that she can learn more about a plan from its participation levels than she can from its asset size. She compares her role as consultant to "a kind of pension doctor," "Employers come to me knowing that they need help with their plans, but they don't necessarily know what they need. I help them evaluate their plans and articulate their objectives."
She can relate
When plan sponsors turn to Atlanta, Georgia-based Veritas Consulting Group, they meet a consultant who can relate to their concerns firsthand. Tammy Oakes Hughes, a managing consultant and founding director of Veritas, has worked both sides of the fence, having once managed Holiday Inn Worldwide's retirement programs. Hughes also spent time in defined contribution consulting roles with both Watson Wyatt Worldwide and Ernst & Young. She founded Veritas in 1995, in affiliation with the Atlanta-based ERISA law firm of Mazusky & Dunaway.
Oakes Hughes says that plan sponsors are becoming more concerned about the fees they are paying to their providers, prompting an increasing number of vendor searches. "It is too difficult a task for plan sponsors to take a per-head fee and try to break it down into all the different cost components," says Oakes Hughes, echoing Bermani of the Society of Plan Sponsors. "We analyze what the different costs are and help plan sponsors understand what they are paying for versus the value they are receiving."
Oakes Hughes also evaluates the administrative aspects of clients' plans, performing work-flow analyses on payroll and other processes to see how administrative procedures can be improved. "Employers want to take more of a life-event approach with their plans and need to be certain that their administrative processes and procedures can support that goal," says Oakes Hughes.
When all is said and done, it is the new wave consultant's flexibility and versatility that sets it apart. Recently, one of Oakes Hughes' clients asked her to provide on-site staff support for a benefits staff member that was going on maternity leave. She immediately obliged by sending out a staffer. "In smaller companies where staffing is limited, there is a real need for someone who can walk right in and take over plan administration and recordkeeping duties in a pinch," says Oakes Hughes. "As plan designers, we are a logical source for that service."