Since 1995, 401k Source, a research company based in Towson, Md., has published the 401k Averages Book, a comprehensive reference tool used to assess the competitiveness of 401(k) recordkeeping, investment management and trustee fees. The publication is edited by the company’s co-founders, David Huntley and Joe Valletta (pictured). EBA recently spoke to Valletta about market dynamics in the 401(k) plan services industry. What follows is an edited transcript of the converstaion.
Employee Benefit Adviser: Do you expect to see more consolidation of players in the DC plan recordkeeping industry?
Valletta: It’s a business of scale, so I expect that the players will continue to look for acquisition opportunities to increase profitability, and smaller players that find it hard to be profitable may welcome the opportunity to be acquired. The required investment in technology is huge, and it’s hard for some of the smaller players to keep up. Others will focus on niche markets. It’s also possible that some of the players that have already left the market will, with the benefit of better technology, come back. And some that have only been serving the large plan market may see an opportunity to expand into the small plan market.
EBA: Is it really just all about information technology?
Valletta: No, not really. It’s still a people business. You need to be able to hire good people to do the job well, and provide responsive service. That’s still the core business. You have to pay people well to do that, and you have to be able to continue. Plan sponsors will maintain their relationships based on the quality of vendor performance with the basic tasks of recordkeeping. That’s more important than all the bells and whistles. Nothing will get a recordkeeper fired faster than poor customer service.
EBA: Is it more important for a recordkeeper to address a problem quickly than to
avoid one in the first place?
Valletta: That’s not necessarily a choice they have. This is a complicated business, particularly when you get into administering plan loans, hardship withdrawals and distributions. There’s a lot going on there, a lot of working parts, and you’re going to make mistakes. Those happen. So, the key is being proficient so you make a lot fewer mistakes, and resolving them quickly when they happen.
EBA: Sure, but “quality service” doesn’t sound like a very sexy selling point for a recordkeeper. What about the other services?
Valletta: True, but it’s their bread and butter. But other things like new participant interfaces are a big deal—being able to access account data on mobile devices and so on. And all the ways plan sponsors can touch participants — helping them accumulate assets, plan for retirement. Promote financial wellness. It’s primarily technology-driven, and all those new technologies are a pretty big spends.
EBA: Sponsors are also under a lot of pressure for transparency and keeping plan costs down, particularly the ones participants are incurring, right? Recordkeepers have had to respond to that.
Valletta: That’s right. You’re seeing a lot more stripping out any of the revenue-sharing offsets that made the fees costs more opaque. Now you’re seeing recordkeepers in their proposals and bids laying out required revenue per participant, and itemization of charges for specific services, so many custom mailings, communications, 404(a) mailings. So you have your base cost number, and then some add-ons. It makes proposal comparisons and the due diligence process more straightforward than it ever was before.
EBA: How often do you find bids are widely divergent?
Valletta: When it’s a true apples-to-apples comparison, it’s typically going to be a pretty tight range. But it can vary depending on the role of the adviser. But overall the market has gotten pretty efficient, and record-keepers know where they need to come in to be competitive.
EBN: In what other areas do plan sponsors need to be looking to be sure they’re getting a good deal? Are any recordkeepers still trying to get sponsors to only used their proprietary investment products?
Valletta: I don’t see much of that any more, except in the small plan market. But it may be that the recordkeeper’s own funds, like target date funds where there are such heavy fund flows, have better pricing. Of course cost is not the only criterion you would use in selecting a target-date fund or, for that matter, choosing a recordkeeper. But if you independently determine, using all the applicable selection criteria, that the recordkeeper and its target date funds are right for your plan, you might save a bit this way.
EBN: Does it often work out that way?
Valletta: Yes, if the recordkeeper considers it an advantage to have its clients also use their funds, they might make the pricing attractive. And typically the recordkeeping cost is borne by the participants would use in selecting a target-date fund or, for that matter, choosing a record-keeper.
EBA: How does the recordkeeper know what funds a plan sponsor will want to incorporate into the plan, if it will take that into consideration in pricing recordkeeping services?
Valletta: If a sponsor is switching providers and is planning a re-enrollment of target-date funds from its former provider into the new one, and default participants into the new target date funds, that will give them a good idea of what they can expect. They’ll know that 90% of the money is going to stick. Usually the plan sponsor will do their analysis upfront on the investments, then look at the recordkeeping next. And most of the recordkeepers are going to say, “Hey, if I’m the recordkeeper and I present on a bid, I’m going to present if you reenroll everybody into my target-date funds, here’s one price. If you just use my recordkeeping services, which we’re fine with, here’s my other price.”
EBA: When sponsors are asking for bids for target date funds, what are the key variables they’re looking at?
Valletta: Many are using the guidelines that the Department of Labor came out with back in 2013, and many have built upon that with their own checklist. One of the key areas is to try to understand how your population and your demographics and your savings rate fits into the fund’s glide path. So that was one of the pieces in addition to the other people-process-performance type analysis that needs to go on. It’s important to start the process with an open mind, for example, on whether you want multiple fund managers involved. It’s always prudent to hear from both sides unless you know for sure that your committee is on one side of the fence or the other. But if you listen to both parties, that’s going to help you tremendously to understand what’s best for your plan.
EBA: What macro forces do you see emerging over the next decade or so?
Valletta: Much of it comes down to workplace demographics. Baby boomers are worrying about how to turn their nest eggs into an income stream to live off of. Many of them haven’t used their 401(k)s enough to make that possible.
The good news is that we’re seeing younger employees like millennials benefitting from all the automated services. They’re getting defaulted into the plan, their deferrals rates are being increased automatically, and there doesn’t seem to be a lot of opt-out pushback. So there will be a lot of focus on the older employees who aren’t doing as well. But that will require hard choices on the part of those employees about how much to save and when to retire; the record-keepers, investment managers and for that matter, the employers, can only do so much to help them. But all plan participants are benefiting from a steady improvement in the quality and variety of services available.
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