Large employers to shuffle 401(k) lineup

Nearly half of large employers plan to add or replace funds in their 401(k) plans in the next 12 months, according to a newly released study. The study, "Large Plan Sponsors Expectations," from Spectrem Group, a Chicago-based research and consulting firm, showed that 43% of employers with 1,000 or more workers were planning to replace the funds in their 401(k) lineup in the next year. That's a sharp rise from 18% of employers in 2005. In fact, industry leaders said that typically, 18% to 20% of employers change their fund lineups annually and it's surprising to have such a large number of employers who are considering making changes in the next year.
It's unusual for so many plan sponsors to make changes to their 401(k) fund options, said Rick Meigs, founder of 401khelpcenter.com LLC in Portland, Ore. "I can't imagine why 43% of plan sponsors would be willing to change in one year," he said. "It's definitely an exception."

CATALYSTS FOR CHANGE

There are a number of reasons that employers are acting now to make changes, said Gerald M. O'Connor, a director at Spectrem. He said much of the interest is driven because companies are setting up automatic enrollment plans for their employees. They're also adding target date funds and making changes in light of the volatile stock market, according to Mr. O'Connor. "You've got a bump in the market, and when that happens, people will take a long look at their funds and many will make some changes," he said. The organization did an online poll in January and February of 150 large employers with 1,000 employees or more. Many firms are starting to offer automatic enrollment for their employees, and this has created changes by plan sponsors, said Alain Michnick, New York-based director of retirement services at Stifel Financial Corp. of St. Louis. He's already noticed that plan sponsors have begun changing their 401(k) lineup in recent months. "Once they recognize they want to offer a qualified default investment alternative, then they start looking at the funds, and once you get people's attention, they'll dig deeper than you might first imagine," Mr. Michnick said. He also said that once employers evaluate funds, they might learn that they're too costly and decide to make changes simply to get lower-cost firms. Stifel manages $60 billion in assets.

PROACTIVE ADVISERS

In the survey, employers rated their adviser's performance by assigning a letter grade; A was considered excellent and F was failing. One in three advisers received the top grade. Plan sponsors said their adviser needs to be more proactive to earn an A. "Pay more attention to us" was also listed as a top answer. Plan sponsors said they want the adviser to take the initiative and make the contract rather than letting the sponsor initiate the discussion. It was quite interesting that plan sponsors stated that they want their advisers to be more proactive, Mr. O'Connor said. "Maybe if they made a few more e-mails or phone calls, it would give the impression that they're doing more," he said. Meanwhile, Mr. Michnick, who advises plan sponsors, said that advisers who aren't specialists may not focus on the plans as much as they should. "There are a lot of good advisers who focus on retirement. There are others who may stumble on a plan. If they don't specialize in retirement plans, they won't be as proactive." The analysis also showed that nearly 90% of large plan sponsors used an outside adviser for making decisions regarding their retirement plan. It also showed that as plan size increased, employers found it necessary to use the services of more than one individual to advise the plan. Among the plan sponsors that used an adviser, two-thirds used a single adviser that was affiliated with the plan provider. Among those using non-affiliated advisers, nearly 50% used a fee-paid employee benefit consultant. The study showed that 60% of plan sponsors looked to their advisers to provide investment education and about the same number were looking for their adviser to provide advice. E-mail Lisa Shidler at lshidler@investmentnews.com.