MJM Financial, LLC 401k Workshop Series

Successfully Managing the 401k RFP Process

June, 2005

Today’s Agenda

• The current provider marketplace• Steps in the RFP process

– Defining plan needs and objectives– Providers

• Who to ask• What to ask

– Fee and investment analysis– Evaluation & selection

• Service, trust & advisor agreements• Other plan sponsor considerations• Q&A

For the last twenty years, 401k plans have been sold rather than bought.

The industry has been dominated by the product manufacturers and product distributors.

The object of a good RFP and selection process is to change the emphasis from the sell side to the buy side, and help make the plan sponsor an educated buyer.

Changing the Emphasis

The Current Provider Marketplace

The 401(k) Company401k EasyABN AMROADPAIG ValicAmerican ExpressAmerican TrustAmeritas Life Insurance CorpAMVESCAPAUL Retirement ServicesBank of AmericaBB&TBISYS Retirement Services BOK FinancialCitiStreetCorrell Co.DailyAccess Corp.Diversified Investment Advisors EPIC AdvisorsFederated Retirement Plan ServicesFidelity Investments

Franklin TempletonGreat-West LifeThe HartfordHewitt AssociatesICMA Retirement CorpINGInvesmartJP Morgan Retirement Plan ServicesLincoln FinancialManulife Financial (Hancock)Marshall & IIsley TrustMassMutualMcCready & KeeneMellonMerrill LynchMetLifeMFSMilliman USAMutual of OmahaNational City BankNationwide FinancialThe Newport Group

New York Life Investment MgmtOppenheimer FundsPaychexPNC AdvisorsPrincipal Financial GroupPrudentialPutnam InvestmentsSchwab Retirement Plan ServicesScudderSecurianStandard InsuranceSunGard EBSSuntrustT. Rowe PriceTransamericaU.S. BankUnion Bank of CaliforniaThe Vanguard GroupWachoviaWells Fargo

Sample Plan Providers

Source: Plansponsor.com

“Technological innovations will cause most companies to produce identical products and services. For companies to survive, they will have to become experts at confusing the public into thinking their generic products are better than their competitors’ generic products.”

Scott Adams, the creator of Dilbert

Funny…But True?

Looking Ahead

• At present, most 401k plans overpay• Despite this, most providers are not wildly profitable

– Some make money, some lose money– 401k underperforms other business lines

• Marketplace changes– No new 401k formation in recent years– Providers swapping existing clients– Baby boomer retirements – Increasing fee pressures

• Consolidation and business “exits” will continue– Believe it or not, this may be good– Fewer better solutions

Steps in the RFP Process

• Experience with the process

• Detailed knowledge about providers

• Access to marketplace data

• RFP questions database

• Shield from provider sales force

• Cost money

• Have their own biases

• May not know you and what you’re looking for

• Have a process that may “take over” the search

• May filter a direct flow of information to/from the provider

Pros Cons

Should You Hire a Consultant?

Source: Plansponsor.com

Make sure that the consultant is a consultant!

Step 1

Step 2

Step 3

Step 4

Define Needs & Objectives

EstablishCriteria &

Procedures Comparative Analysis

Select& Implement

Understand all of the plans requirements, as well as desired improvements. Document these carefully. Involve all stakeholders in this first step. Determine who will participate in the overall vendor selection process.

Set a realistic timeframe for vetting providers. Decide on which providers should participate and why. Establish evaluation criteria.

Score providers based upon replies and interviews. Distinguish the operational analysis from the investment analysis.

Implement standards, criteria and process for evaluating choices, both initially and on an ongoing basis, in light of plan and marketplace changes

Monitor

Steps in the Process

Defining Needs and Objectives

• What has prompted the search/RFP?– Are there problems with the incumbent?

• List them all• Are the problems fixable without leaving?

– Are you just looking?• Benchmarking• 3-5 year rule/negotiating leverage

• Review of existing documents– Plan document & amendments– Investment Policy Statement (IPS)

• What must we have versus we would be nice to have– Ranking services and features by importance

• Understand what the various stakeholders want– The very few decide for the very many– Fiduciary duty & the exclusive benefit rule

Who to Ask

• A reasonable list of potential candidates• Who not to ask

– Eliminate those who aren’t suited to your specific needs• TRO or TBO; multiple SDA (brokerage) options• Complex contribution formulae; company stock• Conversion target date

– Pre screen with phone calls• Provider types

– Look at their primary business focus (not bundled vs. unbundled)– Asset managers

• Mutual Fund, Insurance Company Bank, Brokerage Firm

– Non-asset managers• TPA’s, consulting firms, custodians, payroll providers

ExamplesPlan Size Potential Providers

Micro/Start-Up

Small

Mid-Size

Large

• Hancock (Manulife)• Great West

• Principal• Wells Fargo

• Vanguard• T. Rowe Price• Milliman/Schwab

• Fidelity• Citi Street• Hewitt

• Newport Group/Matrix

• ADP

What to Ask

• Organization & History

• Client Service & Quality Assurance

• Recordkeeping & Administration

• Compliance & Regulatory Services

• Plan Loans

• Reporting

• Website, VRS & Call Center

• Plan Conversion

• Systems Capabilities & Hardware

• Communication & Education

• Expenses

• Investment Platform

What to Ask

• Sample questions from 401khelpcenter.com

• Provide very specific facts about your plan– Demographics

– Unique needs or constraints

– Goals and objectives

– Investments

• Request a three year cost projection based upon certain plan growth assumptions– If fees are asset based and assets double, do fees double?

Loan Setup

Coverage Testing

ADP/ACP Testing

Audit Support

Form 5500 Information Only

Signature Ready 5500

Per Participant

Account Maintenance

Per Fund Fee

Trustee Fee

Plan Sponsor Website

Transactional and Educational Website

Conversion of participant records

Establishment of trustee link

Loan Conversion

Internet and Intranet Access

Toll-free Service Center

Toll-free Voice Response System

Wire Transfer Fee

EFT

QDROs Processing

Approval of DROs

Fund Transfers

Minimum Distributions

Installments

In-service Distributions

Hardship Withdrawals

Approval of Hardship Withdrawals

In-kind Distributions

Lump Sum Distributions

Loan Maintenance

Ad hoc reports

Tax statements

Programming plan changes

Consulting on plan changes

Administration manual

On site employee meetings

Investment advice available to participants - Ongoing

Investment advice available to participants – Setup

Retirement planning and modeling

Confirmation Statements

Enrollment

Determining Eligibility

Participant Statements

Internet Customization

Operational Expense Categories

Plan Sponsor

Trustees

Record Keeping

Administration Directed Trustee

Custody

Consultant

Investment Options

Bundled Vendor

Participant Education

Fees likely to be paid direct from plan assets

Fees likely to be paid indirectly from plan assets

oror

Fee Elements

Cost of fund options plus

3 bps up to 12 bps

$1500 to $7500 per year

$25 to $125 per head plus

$1500 per day plus costs

Bps charge or flat $ per qtr.

35 bps up to 200 bps $1500 to $7500

Investment & Fee Analysis

The Typical Approach to Fees & Investments

• You send the potential vendor your current funds

• They propose mapping to new funds– 60-80% their funds

– 20-40% other name brands (American, PIMCO, Alliance Bernstein, Dodge & Cox, etc.)

• Depending upon plan size, the average fund cost will be between 70 and 150 bps– All other services (recordkeeping, compliance, trust,

education, etc.) will be free

– Certain participant costs (loans, distributions, etc.)

A Revised Approach

• Take the provider out of the investment driver’s seat

• You propose the investments– Focus on retirement target portfolios or asset allocation funds

• Why? Because it’s asset allocation that matters

9%

91%

Asset Allocation Security Selection & Market Timing

Source: Brinson, Hood & Beebower; Determinants of Portfolio Performance

Investment Objective

• Great portfolio options for our participants –– What can we do, how can we do it, and at what cost?

• Pre built– Lifestyle/Asset allocated/Retirement target

• DIY (build our own)– Manager & instrument choice

– Single NAV – fund look & feel

• Understanding the totality of the investment platform– What’s available and what’s not

– Provider requirements• Proprietary & partner

• Can we get (buy?) other access?

A Revised Approach

• Give providers an investment structure to bid on– Assume 80-90% assets invested in “portfolios”

– Example • Vanguard Retirement Target series

• DFA Global Portfolios (I class)

• The responses will give you a better understanding of fees and investment parameters– Non-issue for non-asset managers

– For asset managers• Some may not do it; will suggest modifications

• Some may want certain minimum fund requirements

Overall Fee Comparison

% %1.48% 0.47%0.00% 0.075%0.00% 0.10%0.00% 0.02%

-0.02%0.04%0.20%

1.48% 0.65%$390.95

Employee Education

($256.60)$171,238

$19,710$4,500

Per Head RecordkeepingAdministration & Compliance

$100

3 years 3 years$19.95

$20 per$75

Loan Processing - Annual Maintenance $25 $0$75 (per loan)

$25$5 per

$50$120

$$193,206($14,414)

$112,392

($19,710)($4,500)

($3,748)

($38,437)

$3,748

$24.95

$647.56

$150 (one-time)

$70

$50

$75included

included

SDA - Online Cost per TradeFee Guarantee

QDRO ProcessingSDA - SetupSDA - Annual Participant Charge

included$75

Online Advice Hardship Withdrawal Processing

Annual recurring costs $$90,424$14,414

$$283,630Investment Management

Trust, Custody & Trade Platform

Less Revenue Share Recapture

Distributions (of any kind)Enrollment Kits

Loan Processing - Setup

Investment Consultant (RIA)Total Recurring CostPer Participant

Plan Conversion $0 $5,000

$283,630

Non-recurring (ad hoc) costs

$38,437

Difference

$0

$7,500 ($7,500)

$0$0

Provider A Provider B

Selection

• Enrollment

• Communications

• Recordkeeping

• Administration & compliance

• Design & documentation

• Overall architecture

• Portfolio flexibility

• Portfolio structure

• Investment managers

• Financial instruments

Operational Investment

Understand the Distinct Functions

Remember, a 401k is an investment program that has specific operational requirements

Provider Evaluation & Selection

• Tough decisions– Good vs. bad – EASY…. good vs. better vs. best – HARD

• First cut/second cut

• Rarely a clear winner

• Non-quantitative factors– Chemistry – look & feel of materials, etc.

• Default to investment platform?

• Ties go to the incumbent?

• Insider vendor relationships– The vendor has a formal or informal relationship with the plan

sponsor beyond the 401k plan• Greater degree of scrutiny & documentation

• Potential prohibited transactions & exclusive benefit violations

Categories Fidelity T. Rowe PrincipalOverall Investment Platform 1 2 2Asset Allocation Strategies 2 3 2Likelihood of Business Persistence 3 3 3Service Culture 2 2 3Name Brand (participant perspective) 3 3 2Educational Materials 3 3 3Plan Document Flexibility 2 2 2Technology Development 3 3 2Overall Expense (Cost) 2 3 2Service Agreement 0 0 0

Ad Hoc Reporting 0 0 0Education Delivery/Participant Services 2 3 3

24 28 27Total

1 = Good 2=Better 3=Best

31Local Presence 1

Evaluation & Selection

Service, Trust & Advisor Agreements

Service, Trust, and Advisor Agreements

1. Term provisions.a. What is agreement’s term?

i. Evergreen clause?ii. Termination notice requirements.

b. Early termination fees?c. What documents does client get upon termination?

2. Indemnification provisions.a. Who is indemnified?b. Under what circumstances is provider indemnified?

i. Gross negligence vs. mere negligence.ii. Notification provisions. iii. Exception for negligence, gross misconduct or fraud.

3. Trust statement provisions.a. Trustee free from liability unless error in statement not discovered and

reported within 30-60 days?i. Exception for negligence, gross misconduct or fraud?ii. Can number of days for reporting error be expanded?iii. Can trustee remain liable for period under statute of limitations?

4. Governing law, Arizona or State where provider has headquarters?

Service, Trust, and Advisor Agreements

5. Venue, i.e., place where litigation over agreement will be held.

6. Arbitration.a. Binding?b. Venue?c. Who picks arbitrators?

7. Float income.

8. Liability caps.

9. Testing to be performed?a. Explicit statement of tests to be performed?b. Statement of hard copy of testing to be given to client?

10. What other services will TPA perform?a. Prepare plan and/or SPD/SMMs, 5500, SAR?b. Plan administrative manual.c. Distribution processing, 1099Rs, 402(f) tax notice, distribution

forms and necessary consents.d. QDRO, loan, withdrawal administration.e. Cost of any additional services to be provided.f. Control group and affiliated service group analysis.g. Vesting and eligibility determinations.

Other Plan Sponsor Considerations

• Site visits

• References– Get them & call them

– Get a few who left within the last 18 months

• Miscellaneous considerations– Are you currently in discussions regarding the sale, merger or

disposition or your 401k business?

– Any system conversions planned within the next 12 months or implemented in the past 6 months?

– 401k specific litigation?

Resources for Sponsors

• Fee disclosure worksheets– http://www.dol.gov/ebsa/pdf/401kfefm.pdf

– www.psca.org

• Recordkeeping Surveys & Product information– www.plansponsor.com

– www.cfo.com (401k buyers guide)

– www.401kexchange.com

• Articles and other resources– www.401khelpcenter.com

Thank You