The Problem with Multiple Retirement Plan Vendors

This environment is certainly not good for the employee. In a multiple vendor environment, participants lose all economies of scale that come with a consolidated plan level account. Retirement plans with several millions of dollars are more visible to the institutional marketplace. With this visibility comes increased services and much lower costs. Participants can easily save 1% per year in fees by moving from a high cost “retail” solution to an institutional solution. For a participant saving $5,000 per year for 25 years, a 1% fee savings equals nearly $60,000 - and that is just for one participant.

Services to employees can also be improved in a single vendor environment. Meetings with employees become less focused on which company is better (or has a better salesperson or has the better food at their meetings), and becomes more focused on educating employees which investment vehicles will meet their goals. This change in focus is significant. Gone are the rumors and the watercooler conversations of who is the cheapest vendor, who has the best investment products, and who has the best information. Replaced is an environment where the employee feels comfortable that they are getting great service and great pricing, and can instead focus on achieving their retirement goals.

The benefits of a single provider for the employer are also significant. The most important is increased fiduciary protection. Many entities mistakenly believe that by having a hands-off approach they don’t have any fiduciary liability. Fred Reish, of Reish, Luftman Reicher & Cohen, one of the most visible benefits attorneys in the country, disagrees. “Exempt 403(b) plans and government 457(b) and 403(b) plans are also subject to legal requirements, just not ERISA’s. Instead, they are subject to the laws of the states in which the plans are established. Many of the state fiduciary laws are based on principles similar to those underlying ERISA – such as modern portfolio theory, the prudent man rule, and the use of generally accepted investment principals – and a number of state statues use language that is virtually identical to the provisions of ERISA”.1

Spelled out in the Uniform Prudent Investor Act, enacted in the vast majority of states across the nation, is the fiduciary duty to select, monitor and prudently review the performance of plan vendors and service providers. That means the entity must act prudently with expertise in fulfilling the duty to monitor the plan’s investments, the duty to monitor the plan’s costs and fees, and its service providers. Multiple vendors makes this duty nearly impossible to fulfill.

Case Study
Innovest was recently hired to assist in the consolidation of the 403(b) Plan providers for Jefferson County Public Schools, the 26th largest school district in the country. The district was sending $13 million per year in payroll contributions to 55 vendors. They knew that 55 was extremely cumbersome, but they did not think it would be possible to consolidate down to just one. In the request for proposal process, we asked for pricing and service levels for different scenarios (i.e, one of five vendors, one of three vendors, and the only vendor).

However, the proposals for a single vendor were extremely compelling and in the end, they did select one vendor. As a result, the school district received a single governing plan document, a full time educator that was dedicated to their school district (this was their only client and only job), better investments with transparent fees (no annuities with surrender charges, high costs, and hidden expenses), and lower fees. It is estimated that this action by the school district will save each of their employees between $10,000 and $100,000 by the time each participant retires. In addition, participants now can easily determine the fees they are paying.

The school district is now better able to oversee and monitor the services and activities of the vendors, to ensure their employees are getting cutting edge solutions, and hold the vendors accountable. We are confident that through this process, the participants have a higher probability to meet their retirement savings goals.

“Reducing the number of providers was very challenging and employees expressed concerns about the reduction in choice of 403(b) providers. However, it was difficult for anyone to dispute the decision because of the work and thinking that went into the process. Once employees were given information on the selected vendor (good detailed communication), the concerns declined substantially. Now that we are two months into the implementation, employees are enjoying the benefits of a highly skilled, on site 403(b) provider representative and much-improved retirement education opportunities.” Lorie Gillis, Chief Financial Officer, Jefferson County Public Schools.

While huge strides were made, not everyone was happy – namely 54 plan vendors that were displaced. Time and time again during this project Innovest was reminded by some of the vendors that we were trying to force the 403(b) plan into a 401(k) solution and 403(b) plans shouldn’t be treated the same. Our answer was “Why not”? Pricing in the entire retirement plan arena has come down significantly over the past few years and services have vastly improved. The market has changed and evolved. Millions of participants in 401(k) plans are enjoying better services and lower fees, thanks to disclosure, transparency, and a single retirement plan vendor. We, unlike some of the displaced vendors, believe our nation’s teachers and not-for-profit employees investing in 403(b) Plans deserve the same.

1 “Fiduciary Rules Applicable to “(b)” Plans” by Fred Reish and Bruce Ashton. January 2005. Journal of Pension Benefits.