How Good Is Your 401K Plan?
For all the good they may do us one day, 401(k) plans suffer a serious flaw. It's the gap between their beneficiaries and the mutual-fund companies, banks, brokers, and insurers that provide the plans. In that gap stands the employer, who shops for 401(k)s on behalf of employees. However well-intentioned, companies can't care about their 401(k) plan as deeply as employees, who have small say in its choice yet are responsible for its ultimate success and pay most of the fees. For a $100,000 account, management fees might run $500 a year--or $2,000.
With more than $1.5 trillion now in 401(k)s, we can pray that each plan offers great service at a fair price. Or we can probe a bit. That's becoming easier thanks to some new Web-based ventures. They aim to be marketplaces where employers or their advisers can go 401(k) shopping. "The 401(k) is becoming the most important benefit offered to employees," said Fred Barstein, founder of 401kExchange.com. Yet how plans are picked "is incredibly primitive. So we said: `Let's educate the market about itself."'
To do that, in 1996, Barstein set up a telephone call center in West Palm Beach, Fla. Then, he began surveying employers to see how happy they are with their 401(k) plans' service, record-keeping, fund offerings, performance, and more. The results, which in January went online at 401kExchange.com, have grown into a database drawn from 100,000 employers, for whom Barstein assembles detailed comparisons of plans. He also has created a customer "Satisfaction Index" ranking major sellers of 401(k)s, much as J.D. Power & Associates ranks cars (table).
A competing company in metro Minneapolis, PlanAnalytics, is taking a different approach. It has sweet-talked lots of 401(k) providers, including such giants as State Street Research and Franklin Templeton, into filling out a lengthy questionnaire. It gathers all kinds of details on each of the plans they sell, from investment offerings to how swiftly they invest an employee's contributions or process applications for loans.
With all that information, PlanAnalytics comes up with its own ratings modeled on Morningstar's five-star system for evaluating mutual funds. In July, it began posting these "S401k Ratings" (the "S" is for "Search") at its site, search401k.com. "We want providers to come to us and say: `How do we improve our rating?"' founder Eric Schneeman told me. "We've already had some do that."
TAKE A PEEK. Because both sites are aimed at buyers and sellers of 401(k) plans, they don't directly help employee-beneficiaries. In a few weeks, 401kExchange.com intends to make its satisfaction rankings public. Until then, you might register as a plan buyer and view them that way. Search401k.com expects to make its S401k Ratings available to the public by Oct. 1, but it intends to keep more detailed comparisons of plan features and costs reserved for employers, brokers, and sellers.
Both services are free to employers. Although neither yet makes money, I'm hoping they or other ventures will succeed by making this market more transparent and efficient. Many plans, especially those for smaller companies, are chosen hastily because executives have little time to devote to what can be a mind-numbing, low-priority chore. That can be a costly mistake since there's a wide range of features and fees, some of them fat. A broker selling a 401(k) plan stands to get a first-year fee of 1% or more of assets, plus perhaps 0.25% in each following year. "Even for a broker who knows what he's doing, that's a lot of money," Barstein said. "There's definitely room to squeeze that broker."
How might you exploit all this? If you're happy with your 401(k), sit back and let the relentless revolution toward more information roll on. But if you suspect your 401(k) plan could be better or cheaper, you can show your employer an easy way to check out your suspicion.
Questions? Comments? Send an e-mail to firstname.lastname@example.org or fax (321) 728-1711