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.
Tip About 401k
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.
Traditional 401(k) plan vendors did not think much about approaching smaller companies until recently, and did so then only because they recognized that the larger-company market was pretty well saturated. When they did turn their attention to the smaller and mid-sized plan market, they were well prepared with a library of useful educational materials for potential and actual plan participants. Participation is participation, after all, whether it is in a plan with 50 participants or 50,000.
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 companies make most of their money by acquiring, holding, and managing investment assets in their various fund portfolios. In some cases, 401(k) administration may be offered to the employer-plan sponsor at a price below its actual cost to the mutual fund company as a device for attracting and holding new assets, on the assumption that 401(k) savings tend to be long-term, giving the mutual fund company many years to collect management fees.
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
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.
Internet Use for 401k Plans
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%. Some recent statistics on small business Internet usage is provided below.
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
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 and load fund companies 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.
