How to Get Better Value from Your 403(b) Provider — Without Doing an RFP
The landscape is changing rapidly for the University 403(b) marketplace. Regulatory reporting and increased scrutiny of vendor products, especially in the area of fees, has prompted many sponsors to review their offerings for the first time and get better value for themselves and their employees. Many have taken the route of going to the marketplace by issuing a request for proposal (RFP) to evaluate the options that may be available. A few others have opted for a detailed comparison of their existing vendors, essentially doing an "incumbent RFP," to push for a lower fees and enhanced services with one of their current providers.
Recently, we compared the incumbents for a university in the northeast that had two vendors. The university was looking to consolidate with one vendor to ease the regulatory reporting burdens and to push for enhancements from the selected vendor. The detailed product comparison provided some eye popping information for the retirement committee. Some of the more striking data is outlined below:
- Captured only 10% of assets and contributions
- Variable annuity product with high fees including an annual participant fee of $12 each, average fund fees of over 2.30% (includes mortality & expense fee of 1.25%)
- Restrictive withdrawal fee of 7% applied to each deposit and takes 15 years to go away
- 88 different fund choices with many funds being offered in some asset categories
- Internal connection to the university (the local broker was the son of a key alumnus and was a graduate of the university)
- Captured 90% of assets and contributions
- Older variable annuity product along with recent mutual fund additions with low fees. No annual participant fee and average fund fees were 0.50% (including a mortality & expense fee of 0.005%)
- Some restrictions for withdrawals on one of the older options (fixed account) but none on the remaining options
- 28 different investment choices with
- relatively limited overlap of offerings across
- the asset classes
- Contact was not local (2-3 hours away) with no internal connection, but a national fixture in the university marketplace
Prior to sharing this information with the retirement committee, we approached Vendor B to see what we could negotiate for an improved offering for the university. The offer to Vendor B was to be exclusive for all contributions going forward and to move as many of the Vendor A assets as possible to them in a 6 month window. After many talks we were able to negotiate:
- A reduction in fund fees by approximately
- 20%, bringing the average cost down to 0.40%; an offer to add mutual funds to cover more
- asset categories
- A plan expense reimbursement account of approximately $50,000/year
- An offer to pay any withdrawal fees for
- assets moving to Vendor A during the 6 month window period
- Vendor B would provide a series of onsite meetings with employees, including one-on-one opportunities so employees could explore their options with a counselor
With this information in hand, we presented our findings to the retirement committee and opened some eyes. There were a couple of people on the committee who had accounts with Vendor A. Once we finished the side-by-side comparison they were questioning why they were in these options and not Vendor B's. The side-by-side comparison alone, was probably enough to get the committee to consolidate their program with Vendor B, but when they heard the remaining parts of the negotiated additions being offered by Vendor B, the deal was done. The only remaining details to work out were timing and communications of the change to Vendor B. This university has implemented the entire offer. The plan is now with one vendor that will be receiving the majority of Vendor A's assets
in early 2012.
Bottom line, you don't always need to go to all of the work of a full market RFP. Sometimes you can make a significant improvement for your plan by negotiating with incumbent vendors.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291