For more information: comments@low-fee-401k.com
|
|
401k
Fact To Consider:
According to Southern California-based (401k) Enginuity
(www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).
The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products. 401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.
The Investment Company
Institute (ICI), the trade association of the mutual fund industry,
estimates that at the end of 1998 assets in 401(k) plans stood at $1.41
trillion. These plan assets grew at an average rate of 18% per year
during the 1990s. Plansponsor.com reports that they rose nearly 22% in
the final year of the decade, from $1.7 trillion in 1999 to $2.1
trillion in 2000. Average salary deferral rates of plan participants
have also been on an exponential rise. The Profit Sharing 401(k) Council
of America (PSCA) reports that the average salary deferral rate grew
from 4.2% in 1991 to 5.4% by 1999, an increase of more than 28%
Mutual Fund Investment Companies have provided the best 401(k) option for small and medium-sized businesses. Plans offered by mutual fund companies tend to be tightly bundled, meaning the administration and administrative functions (which may be subcontracted out or conducted in-house by the mutual fund company) are designed to work exclusively with the mutual fund’s proprietary investments. Mutual fund 401(k) plans have been aggressively promoted to the small business communities both by no-load fund companies (e.g., Fidelity Funds, Vanguard Funds) and load fund companies (e.g., MFS, John Hancock, Putnam). Recent news articles, however, have reported a trend among many of these plan vendors to abandon the very small plans because the costs of providing 401(k) services for such plans versus the revenue generated from them has proved to be a losing proposition. For economic reasons, the sales target for mutual fund bundled plans has been raised, and now companies with fewer than 100 employees are not being actively solicited by most of these vendor.
Mutual fund companies make their money by acquiring, holding, and managing inevitable assets in their various fund portfolios. In some cases, the bundled 401(k) administration may offer to small businesses at a loss as a device for attracting and holding new assets, on the assumption that 401(k) investing tends to be long-term, giving the mutual fund company many years to collect management fees.
401(k) plans are
arguably the best government-sanctioned, tax-deferred retirement
savings opportunities in the United States; their numbers have
grown commensurably since their institution by Congress in 1978.
One estimate, by CHALK 401(k) Advisory Board, Inc., places the
number of qualified 401(k) plans in 1997 (the last year surveyed)
at 225,000, and the number of participants in those plans at
approximately 28 million; the Investment Company Institute (ICI)
estimates 36.7 million participants in 1998. New plans continue to
grow in number at an annual rate of more than 14% (U.S. Department
of Labor).
401(k) plans must be
sponsored by an employer. Millions of American workers can’t
take advantage of the 401(k)’s many attractive attributes
because, for one reason or another — typically high plan costs,
plan inflexibility, and/or prohibitive minimum participation
standards — their employers do not sponsor a plan. In
particular, very small, small, and medium-sized companies have
found sponsorship difficult if not impossible. Some 89% of
very small companies (10-50 employees), 72% of small
companies (50 - 100 employees), and 66% of medium-sized
companies (100 - 250 employees) do not have 401(k) plans (Census
Bureau figures). These figures do not include the companies that
have fewer than 10 employees, what might be called
"micro" companies.
The Investment Company
Institute (ICI), the trade association of the mutual fund
industry, estimates that at the end of 1998 assets in 401(k) plans
stood at $1.41 trillion. These plan assets grew at an average rate
of 18% per year during the 1990s. Plansponsor.com reports that
they rose nearly 22% in the final year of the decade, from $1.7
trillion in 1999 to $2.1 trillion in 2000. Average salary deferral
rates of plan participants have also been on an exponential rise.
The Profit Sharing 401(k) Council of America (PSCA) reports that
the average salary deferral rate grew from 4.2% in 1991 to 5.4% by
1999, an increase of more than 28%.
The Labor Department is
currently auditing 401(k) plans of all sizes because of a trend
they think may violate current pension laws. Many companies,
especially smaller businesses, are knowingly or unknowingly
shifting plan administrative expenses to plan participants. This
shift of plan expenses come in the form of excessive "hidden
fees" that are deducted directly from participants’ savings
by certain plan providers and investment providers. Because of lax
reporting requirements, no one really knows how much money changes
hands behind the scenes, but it is estimated that excessive fees
may be as much as $1.5 billion per year, and growing.
The number of companies
without 401(k) plans is growing, too — due to a
less-than-traditional force: vendors who in the past have serviced
smaller businesses are finding it unprofitable and are abandoning
these clients. According to an article by Harris Collingwood and
Janice Koch ("Squeezed Out," in Worth Magazine, Dec/Jan
1999), "All over the country, 401(k) vendors — the
companies that perform investment management, record keeping,
employee education, and regulatory-compliance testing — are
firing their customers. . What this means is that small and
midsize companies are being forced, like it or not, back into the
401(k) marketplace." These companies feel betrayed by the
large 401(k) vendors and are frustrated in their search for a
401(k) plan that their employees will like and that they can
afford.
Mutual fund 401(k) plans
have been aggressively promoted to the small business communities
both by no-load fund companies (e.g., Fidelity Funds, Vanguard
Funds) and load fund companies (e.g., MFS, John Hancock, Putnam).
Recent news articles, however, have reported a trend among many of
these plan vendors to abandon the very small plans because the
costs of providing 401(k) services for such plans versus the
revenue generated from them has proved to be a losing proposition.
For economic reasons, the sales target for mutual fund bundled
plans has been raised, and now companies with fewer than 100
employees are not being actively solicited by most of these
vendors.
Insurance companies lost
their marketing advantage many years ago in the 401(k) Arena by
not moving quickly enough to counter the offerings of the mutual
fund bundled 401(k) programs. Insurance companies have
traditionally clung to the business model of inserting various
insurance products, including life insurance, inside the 401(k)
plans they offer. This has not been a popular decision with plan
participants, especially those of smaller company plans.
Participants learned that they could purchase better life
insurance protection, at lower rates, with after-tax dollars, and
that they were losing some of their 401(k) asset growth potential
by selecting insurance products within their 401(k), primarily
because of the insurance premium costs.
The three primary
reasons why 80% of America’s small businesses do not offer
401(k) plans to their employees are: (a) perceived cost of
employer-sponsored retirement plans, (b) perceived complexity of
company-sponsored retirement plans, and (c) limited investment
options. Mutual fund companies offering 401(k) plans to small
businesses do so by pre-packaging administration with their
proprietary fund investments; this pre-packaged approach, called
"bundled 401(k)" tends to be pricey for small companies,
limited features and limited investment options. Employees who
participate in bundled 401(k) plans typically do not have access
to investments not offered by the mutual fund company, and do not
have access to the most popular investment option today—the
individual self-directed discount brokerage account.
Mutual fund companies
make their money by acquiring, holding, and managing inevitable
assets in their various fund portfolios. In some cases, the
bundled 401(k) administration may offer to small businesses at a
loss as a device for attracting and holding new assets, on the
assumption that 401(k) investing tends to be long-term, giving the
mutual fund company many years to collect management fees.
401(k) plans are
arguably the best government-sanctioned, tax-deferred retirement
savings opportunities in the United States; their numbers have
grown commensurably since their institution by Congress in 1978.
One estimate, by CHALK 401(k) Advisory Board, Inc., places the
number of qualified 401(k) plans in 1997 (the last year surveyed)
at 225,000, and the number of participants in those plans at
approximately 28 million; the Investment Company Institute (ICI)
estimates 36.7 million participants in 1998. New plans continue to
grow in number at an annual rate of more than 14% (U.S. Department
of Labor).
Employees rank 401(k)
plans second only to health benefits when it comes to
employer-offered benefits they desire. 401(k)s offer employees an
unmatched long-term savings potential, primarily because neither
401(k) contributions nor their earnings are subject to income tax
during all the years plan participants contribute before
retirement.
401(k) plans have the
highest annual contribution ceiling of any of the tax-deferred
defined contribution savings programs (IRAs, SEPs, etc.). More
money contributed equals more money earning money, equals more
money in the account 20 years later. Add to this earning potential
the convenience of contributions made through automatic payroll
deductions and it’s easy to see why 401(k)s are so popular
The average 401K account
balance at the end of 1998 was $47,000 per participant, up 26%
from 1996, according to the ICI and the Employee Benefit Research
Institute. On average, 78% of eligible employees will participate
in a 401(k) plan if one is made available, with the number of
participants growing from 19.5 million in 1990 to 53.2 million in
2000. Some of the increase in participation rates is due to the
introduction of "negative election," which allows an
employer to automatically enroll employees into the 401(k) when
they meet the plan’s eligibility requirements. The negative
election deferral rate and investment(s) must be defined ahead of
time, and the employee must be immediately notified of his or her
participation status. Automatic enrollment programs are sanctioned
by the IRS under ERISA as long as the employee has ample ability
to cease enrollment at will.
Many small and
medium-sized companies that have 401(k)s have a bleak future: many
are being canceled because they are not profitable enough a
service for vendors to maintain; in other cases, service is not
being canceled but the level of service is so
disproportionate to the high fees being charged that employers
themselves must pull out or endure the aggravation of continually
feeling they are being overcharged. The company estimates there
are more than 400,000 very small, small, and medium-sized
companies that (a) have no plan, (b) have had their plan canceled
or have canceled their plan, or (c) have a plan they are
unsatisfied with.
Internet penetration and
usage by small businesses is a key component of 401(k). According
to a survey conducted by IDC, Internet usage by small businesses
reached 62% in 1998. Total small business spending on Internet
related applications is expected to increase from $6.6 billion in
1998 to 418.2 billion by 2002, yielding an annual growth rate of
45%.
Recordkeeping firms
represent a small and possibly decreasing fraction of the
available market. These firms tend to be local and regional, and
although they can maintain the "human touch," they
cannot compete effectively with the bundled plans offered by
mutual fund companies.
The three primary
reasons why 80% of America’s small businesses do not offer
401(k) plans to their employees are: (a) perceived cost of
employer-sponsored retirement plans, (b) perceived complexity of
company-sponsored retirement plans, and (c) limited investment
options. Mutual fund companies offering 401(k) plans to small
businesses do so by pre-packaging administration with their
proprietary fund investments; this pre-packaged approach, called
"bundled 401(k)" tends to be pricey for small companies,
limited features and limited investment options. Employees who
participate in bundled 401(k) plans typically do not have access
to investments not offered by the mutual fund company, and do not
have access to the most popular investment option today—the
individual self-directed discount brokerage account
According to HR
Investment Consultants in Towson, MD, publisher of the "401k
Provider Directory, "the cost of running a 401k plan with 25
participants and $750,000 in assets can range from as little as
$6,750 per year to as much as $20,000, depending on which 401k
vendor you select. (Sources: Nation's Business, September 1998,
Myers, Randy "Your 401k Plan May Cost You Too
Much." Business Week Online, July 2000, Brenner, Lynn
"A Wealth of Choices."). By comparison, a 401(k)
Easy or Easy Online system costs only $995 pear year for a
25-person plan---a savings of between 60% and 80% in plan
administration fees.
In the 401(k) provider
industry, expense fee disclosure, whether to plan participants or
plan sponsors, has been a notoriously murky affair. The impact of
excessive hidden fees on plan participants’ retirement accounts
is very significant over time. As example, consider a hypothetical
401(k) investment, such as a mutual fund, with deducted fees of
1.3 percent versus one with fees of just .02 percent. Applied to
an initial $25,000 investment returning 10 percent, and compounded
over 20 years, the difference between the "low-fee"
investment and the excessively "high-fee" investment
adds up to $31, 701
Policymakers and plan sponsors seeking to structure well managed 401(k)s for their aging workforces are beginning to acknowledge the negative impact significant hidden fees has on eroding pension accumulations for retirement. What might appear to be a small difference in pension management fees can result in substantial differences in eventual retirement benefits. The number of companies without 401(k) plans is growing, too — due to a less-than-traditional force: vendors who in the past have serviced smaller businesses are finding it unprofitable and are abandoning these clients. According to an article by Harris Collingwood and Janice Koch ("Squeezed Out," in Worth Magazine, Dec/Jan 1999), "All over the country, 401(k) vendors — the companies that perform investment management, record keeping, employee education, and regulatory-compliance testing — are firing their customers. . What this means is that small and midsize companies are being forced, like it or not, back into the 401(k) marketplace." These companies feel betrayed by the large 401(k) vendors and are frustrated in their search for a 401(k) plan that their employees will like and that they can afford. Mutual fund companies make their money by acquiring, holding, and managing inevitable assets in their various fund portfolios. In some cases, the bundled 401(k) administration may offer to small businesses at a loss as a device for attracting and holding new assets, on the assumption that 401(k) investing tends to be long-term, giving the mutual fund company many years to collect management fees. rrp
|
|
For more information: comments@low-fee-401k.com |