For plan sponsors, now is the time to take advantage of the fast-approaching world of fee disclosures. Whether you use a broker, consultant or go direct, the soon-to-be-implemented 408(b)(2) fee disclosures provide a real opportunity to get a handle on plan costs as well as to implement several best practices when it comes to fees. Here’s a step-by-step overview of the process I recommend:

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.

Now that our SV d-base is up and running, we are already working on the next generation. Not only are we adding more providers to the d-base, we are also creating a ranking scheme to evaluate the various products. The idea is simple – create a comprehensive, yet to easy-to understand way for sponsors to evaluate different products. The approach we take is similar to the approach we use for both our Investment and Plan Health Smartcards™.  We look to add our ranking methodology to our SV d-base no later than the Q1 2012 edition.

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. 

We created a powerful diagnostic tool – the BPG Plan Health Smartcard™. It’s designed to give DC plan sponsors a holisitic overview of their plan expressed as a numerical score.  The methodology is based on two fundamental assumptions: that the purpose of an ERISA-sponsored retirement plan is to maximize the chance that participants will achieve retirement security and that a plan should be run in such a way as to minimize organizational risk and the personal liability associated with being a fiduciary to a plan.

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.

The S&P 500 was flat for the year but what a ride…The extreme volatility makes me wonder about plan participants close to retirement – how do they hedge against extreme volatility?

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. 

Welcome to our new website ! We’ve added quite a bit of new content and we’ll be adding to that in the next few weeks. Please bear with us –I’m sure there will be some hiccups as we refine the site.

This is my first blog and I’ll be learning as I go along. I’ll be writing about 401(k) best practices, the retirement crisis in this country and proven strategies for helping participants achieve retirement security. 

Take care everybody

Matt