Shopping around for a 401(k) plan provider is a lot like buying a new car. Before you head out the door to dealerships, you want to know who has the kind of vehicle you’re looking for, how the seller is rated by other customers and what constitutes a fair price for the car you want. When you go in prepared, you’ll ask better questions, negotiate a better deal and drive off the lot knowing you made a smart purchase.
The same strategy applies to finding a 401(k) plan provider. Taking the time to understand the pros and cons of different providers, as well as the needs of your employees, can simplify your search and ensure your company benefits over time.
Start by consulting with your employee relations and accounting personnel to get a sense of what is working with your current plan, as well as to identify opportunities for improvement. Organize participant focus groups across different age and income levels to more broadly understand the experience of using the current plan, as well as how you might increase participation and improve satisfaction with the new one.
From there, you can define a list of objectives, such as better employee education, more robust investment options and lower service fees. Use your list as a starting point to find a provider that meets your needs. Keep in mind that different types of providers tend to have different pros and cons associated with their services; here are a few key considerations associated with each:
Insurance companies have a niche in the world of guaranteed income products. “If you’re looking for an in-plan annuity, an insurance company is a good place to turn,” says Scott Rice, group vice president and director of plan administration for SunTrust’s employee benefit solutions division. Annuities often have higher expenses and lack portability, however, so they’re not for everyone.
Some insurance companies offer 401(k) plans as well, but the options can be limited. Fees for these plans also tend to be on the high side and can be difficult to understand.
Investment companies usually have a deep knowledge of investment strategies. They may also offer the broadest array of investment choices for participants. However, as their focus is on providing investment options, customer service and fiduciary support may not be as robust as some other options, Rice says.
Third-party administrators (TPAs) cater to either very large or small employers. They’re capable of handling very complex plan documents. “Many of the larger TPAs have Employee Retirement Income Security Act [ERISA] counsel and actuarial resources employed on staff,” Rice says. But mid-sized companies also run the risk of getting lost in the shuffle if their needs are far smaller than those of large corporations, or outgrowing the resources of a small TPA provider.
Banks are uniquely suited to serve the needs of mid-sized businesses. They offer a wide array of plan options, educational tools and essential fiduciary services. “Only banks have trust departments,” Rice says. Furthermore, as fiduciaries themselves, banks can support sponsors in their own fiduciary duties. “Banks are uniquely positioned in the market, as they are permitted to not only act in the capacity of both trustee and custodian for plan assets, but also act in an investment fiduciary capacity under ERISA.”
When selecting a fiduciary partner, sponsors should consider the size and reputation of the bank. “Too large a bank may not offer the personalized support and service the sponsor is looking for,” Rice says.
There are many reasons to conduct a vendor search. You may be looking for more competitive fees, new ways to optimize participation, greater diversity of investment options or enhanced fiduciary support. Regardless of your motivation, the search itself will have satisfied some of your fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, which charges sponsors to act in the best interest of their participants. And most important, you’ll have helped your employees be better financially prepared for retirement.
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