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1. Ask the recordkeeper what it needs to recordkeep the plan. Also ask how much the current investment options generate in terms of “revenue share.”
    
2. If the current investments are generating more in revenue sharing than is required by the recordkeeper, ask where the “excess” revenue is going.
    
3. If you haven’t already done so, the next step is to establish an account where these excess monies are tracked until they are either redistributed back to participants as a “dividend ” or used by the plan sponsor to pay for “ERISA-eligible” expenses.
    
4. Once you know the recordkeeper’s cost structure, the next step is to determine if the fee structure is “reasonable.” When negotiating the recordkeeper’s fees, follow these general rules:

• Make sure to have some comparative date to place fees into a broader context. If you don’t have the time or skill to conduct your own fee benchmarking survey, then consult the 401(k) Plan Averages Book.
• Ask your recordkeeper to price your plan using not only the de facto industry-standard “asset-based fee model” but also a flat, per participant fee structure.
• Ask your recordkeeper if they can or implement a “levelized” pricing structure. Although this approach where everyone pays his/her proportionate share of the recordkeeping costs is fairer than today’s current pricing paradigm where some participants subsidize the recordkeeping costs of other participants based on what funds they invest in and to what degree their funds share revenue.

The other internal database project we have going on, Retirement Income, is well underway. We have created an overview of this fast changing marketplace and a due diligent process to help plan sponsors settle on the right approach to help their plan participants de-accumulate their retirement assets. At BPG, we believe that guaranteed withdrawal benefit (“GWB”) products will become the dominant retirement income product over the next several years although we acknowledge that not all plan sponsors will select this approach. Our retirement income d-base includes other types of products such as in-plan annuity marketplaces and non-guaranteed withdrawal benefit products.

We’re excited to launch this data base as it create comprehensive overview of what is essentially the last major piece of the participant-directed, defined contribution puzzle. 

The BPG Plan Health Smartcard™ looks at a plan from a total of 6 different dimensions: Participation, Total Contributions (both EE and ER), Asset Class Representation, Participant Diversification, Total Plan Costs and Fiduciary Governance. The first two – participation and total contributions – account for 60% of the score with the other elements accounting for forty percent.

In designing our Plan Health Smartcard ™, we’re trying to use relevant and easy-to access data points that are fundamentally objective in nature. And by creating a unique number for each plan at a specific point in time, we can then track a plan’s health index over time as well as make comparisons between plans of different sizes and across different industries.

Finally, we benchmark the plan’s score by comparing it against an “average” plan based on national normative data and against BPG’s client base. Our clients’ scores are divided into quartiles so they have a sense of how they score. Since most plans fall short of a perfect score, we also include high-level recommendations in order to facilitate a conversation with the sponsor about specific tactics to improve the plan.

Q3 2011 BPG Stable Value Database Key Findings

• 1-year investment performance ranged from 1.3 to 4.5 percent. 
• Market-to-book ratios generally increased due to falling interest rates, which was a stronger contributor to the ratio than a weaker corporate sector, which depressed bond prices. 
• Durations ranged from 1.6 to 4.4 years, and have shortened during the year. Ninety percent of the co-mingled funds in the database have durations of between 2 and 3 years.
• Crediting rates ranged from 1.85% to 4.35% and are gradually falling as new contributions are invested at lower current interest rates.  The fees to wrap new funds are ranging from 15 to 25 basis points, and are equal to the yields on short-term bonds, earning a net yield near zero basis points.  Consequently, many fund managers are keeping the funds invested in a money market fund.
• Fund fees range from 10 to 90 basis points. Wrap fees range from 15 to 25 basis points, and are included in the fund’s total fees.
• Wrap providers have taken steps to reduce their risk to stable fund guarantees, by requiring fund managers to follow more conservative investment guidelines than a few years ago. Contract terms are more conservative and there is a greater level of specificity. There are greater restrictions on allowing stable value managers to include “impaired assets” in the portfolio.
• Portfolios have higher allocations to U.S. Treasury and Agency bonds as sources of liquidity, in the event of large cash withdrawals.

About the Blue Prairie Group Stable Value Database

Each quarter, the Investment Analytics Group at Blue Prairie Group sends out a detailed questionnaire to about sixteen leading stable value providers, representing about $150 billion of stable value assets. This information is then compiled into a proprietary database which is used to analyze long-term trends in the stable value marketplace. For example, it tracks changes in the durations and crediting rates of the largest co-mingled funds, and how the managers respond to changes in the levels of interest rates. 

The database also tracks trends in market-to book ratios, changes in the levels of credit risk and in sector allocations and the impact of cash levels on the crediting rate and the duration of the funds.  

The Blue Prairie Group stable value database also covers wrap contract issues asking detailed questions of the stable value managers on how they are dealing with the reality that certain wrap providers are either leaving or planning to exit the business. 

The updated site includes the following enhancements:

• Reflects the expanded service suite at the firm across its 3 core practice areas: ERISA, Foundations & Endowments and Wealth Management.
• Describes in detail the firm’s proven investment philosophy and approach to both discretionary asset management and non-discretionary investment consulting.
• Showcases new and “dynamic” content such as the BPG Stable Value Database, Economic Commentary, Matt’s Blog and Smart Funds performance information as well as showcases the extensive proprietary content Blue Prairie has developed over the years.
• Allows prospective job applicants to read about job openings and provides investment managers well-defined protocols for interfacing with the firm’s Investment Analytics Group (IAG).
• Allows clients and prospects to quickly understand the firm’s compliance profile by reading the firm’s ADV Part II, Code of Ethics, Privacy Policy and disclosures on alternative investments.

Matt continued, “The new website is designed to let current clients and prospects really understand who we are, our unique approach to investment consulting and frankly, how we are different and better than our competitors.”  

He added, “One of the main points of this exercise was to accurately capture exactly where the firm is today and to share it with the outside world. In designing the site, we started with a clean sheet of paper and focused on creating a site that allows our clients and prospects to learn as much about the firm as if they sent us a request for proposal (RFP).”

Blue Prairie Group’s Creative Director, Gina Latinovich, working with staff led the redesign effort saying, “One of the challenges of this project was to design an easy-to-use interface for BPG’s clients and prospects so they can navigate the content-rich site. Our central design parameters reflect the firm’s emphasis on educating and empowering clients to make good decisions. Also, transparency is such a foundational value at BPG that we continued the uncluttered look and feel of the previous site. On a lighter note, we had to find a place for Yip-Yip, BPG’s prairie dog mascot. He’s just too cute to leave out!”

 “Dynamic content” refers specifically to those types of content that are updated regularly such as Matt’s blog, quarterly economic commentary, monthly SMART funds, performance information, stable value database updates, periodic press releases, webinars, legal disclosures and case studies.

One strategy is to park assets in their plan’s stable value option where – depending on the stable value product used – it should be generating somewhere between 1.5 – 2.5 percent. The rationale is simple: at least it stays current with inflation and the principal is protected. The problem with this approach is that it: (1) assumes that a participant has access to a stable value option; (2) assumes that a participant has a sufficient amount in their retirement account to allow for a monthly/quarterly distribution to retirement needs; and (3) doesn’t allow much room for portfolio growth just before and during retirement.

Another option is to use each plan’s “2010” or “Retirement” income sleeve in order to protect the portfolio from significant downside risk but at the same time allow for some growth. But even the relatively conservative “to” off-the-shelf target date funds have equity exposure of between 20 and 50 percent at and through retirement, which can invite excessive volatility.

The other solution is to start looking for a legitimate retirement income solution like an in-plan annuity (basically, a guaranteed withdrawal minimum amount that participants can budget around like Social Security) or at a very minimum, an annuity marketplace. This is Blue Prairie Group’s focus going into 2012. With the completion of the first generation stable value database (more on first vs. second generation in a later blog posting) we are working on a BPG “retirement income d-base.” I will be writing much more on this topic in the coming weeks and months and we have an aggressive internal deadline for completion. 

Dramatic Fee Savings for Multi-billion Dollar 401(k) Plan

Challenge:

Blue Prairie Group was retained by a large, billion dollar Client to reduce the Plan’s total cost structure by moving from an asset-based pricing model to a flat, per-participant fee model.

Results:

1.  Reduced total recordkeeping and trust and custody fees by 36%, leading to first year savings of $1,178,399.

2. Generated 5-year cumulative savings of $6.85 million.

3. Moved the incumbent recordkeeper’s pricing model from an asset-based fee to a flat, per participant fee, so as Plan assets increase, recordkeeping fees would not also increase.

4. Provided oversight of the transition team in transitioning the “old” fund lineup from a series of small-sized collective investment trusts to the “new” Plan lineup.

 Background:

BPG had been retained by the Client since 2008. The Plan Sponsor asked BPG to conduct an in-depth due diligent 401(k) recordkeeper search. Although the Client ultimately stayed with the incumbent recordkeeper, BPG was able to use the pricing information collected during the RFP process to successfully negotiate down the Plan’s total cost with dramatic results.