Monday, February 02, 2009

A 401(k) Freshness Date?

If only it were so. We’ve become quite used to seeing this information on everything from cereal to vitamins, and it’s a good reminder that nothing has an indefinite shelf life. In the benefits world, we get the same type of reminder when a company health plan renews and the CFO needs to decide on a higher deductible, a different carrier, or a different contribution level for employees. The cost of the plan usually goes up unless you do something about it.

But the 401(k) plan goes on and on until someone complains or there is a random event (like a change in management). Because this is a dynamic industry, with a consolidation of carriers and the equivalent of an arms race to provide the best funds at the lowest cost and still have all the “ancillaries,” the expenses are actually coming down. Picture an up and down escalator next to each other, one is the rising value of the plan (contributions + asset growth) while the other is a constant downward trend in cost.

ERISA requires plan fiduciaries to monitor the cost of the plan, but now there is even more incentive to benchmark your program: a cost savings which drops right to the bottom line. Often times you can renegotiate with your current carrier and avoid the hassle of changing. Just find out what they are offering to a new plan with the same characteristics as yours, and insist on the same deal. At the end of the day, it’s cheaper for the carrier to accept a reduced profit margin than to bring on a new client.

We recommend that you spot check your 401(k) plan every year and conduct a full search every three to five years. At least until the industry adopts a freshness date.