Time Is Ripe for 401(k) Sponsors to Revisit Pacts

As consolidation among 401(k) plan record keepers gains momentum, it might be a good time for plan sponsors to renegotiate the fees they pay.

    In the first four months of this year, there have been six acquisitions of record keepers, compared with nine for all of last year. On April 21, Merrill Lynch, the record keeper for 1,870 defined-contribution plans, announced it was acquiring Amvescap’s record-keeping business, which serviced 1,122 plans.

    As defined-contribution plans continue to become the retirement savings vehicle of choice for employers, competition among the record keepers servicing these plans is expected to increase. In response to this greater competition, a growing number of record keepers no longer can afford to stay in the business, says David Wray, president of the Profit Sharing/401(k) Council of America. “There have probably been 25 providers that have exited the business over the past few years,” he says.

    This spells opportunity for employers with defined-contribution plans, consultants say. “Plan sponsors have the opportunity to put a squeeze on providers to lower fees or provide more services,” says Chris Brown, director of retirement market research at Financial Research Corp. in Boston.

    Plan sponsors need to take advantage of this opportunity and make sure that they are periodically comparing their fees and service arrangements with what is available in the market. “If it’s not up to snuff, it’s very likely that there is a better deal out there,” Brown says.

    Time is of the essence, however, says Fred Barstein, CEO of 401kExchange, a Lake Worth, Florida-based consultancy. This merger-and-acquisition frenzy will only last for another 18 to 24 months, he says. “Now is a good time to just conduct due diligence and get market prices and renegotiate with the vendor,” Barstein says. As more record keepers exit the business in the next several months, plan sponsors will have fewer vendors to choose from and thus less leverage to negotiate prices.

    Periodic due diligence reviews are also important given that a plan sponsor never knows if its record keeper is going to be the next acquisition target. In these cases, it is important that the plan sponsor not just accept the acquirer as its new service provider, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultancy.

    “Without doing that due diligence on the acquirer, the plan sponsor opens itself up to liability,” he says. Employers need know what they will review in case their record keepers get acquired, Stone says. “Plan sponsors may be surprised to hear that their record keeper is being bought, but they shouldn’t be surprised about how to handle it.”

    Companies should be aware of the warning signs of a less-than-stellar record-keeping deal. For example, Stone says that if a company’s plan has grown significantly over the past few years but the expenses have remained the same, that normally is a sign that the fees are too high.

    “A huge number of plan sponsors are paying much more than they need to,” he says.

Workforce Management, June 2005, pp. 28-30 —Subscribe Now!