How one plan picked a new
provider amid the mutual fund scandal
» "I Was Stunned"
For Contec, Inc., the mutual fund industry's trading
scandal was the "last nail in the coffin" in its decision
to switch 401(k) providers, says Andy Thrower, chief
financial officer of the Spartanburg, South Carolina-based
maker of products used in critical environments like clean
rooms to control contaminations. "It points to a much
deeper and more costly problem," he says. "The trading
scandals are like what people in the accounting profession
call 'skimming.' There is a lot of money coming off that
people just do not see."
As of January 1, Contec switched to T. Rowe Price Group,
Inc., for its 401(k) plan, which has 140 participants and
assets of about $3.5 million. The Equitable Life Assurance
Society of the United States had been Contec's provider,
and it offered mutual funds from Alliance Capital
Management LP. The plan had about a dozen mutual funds,
including seven from Alliance, one of the companies
implicated in the scandal. "In some cases, the fees are
excessive. Some 401(k) providers have some significant
fees, and that is coming out of employees' pockets,"
Thrower says, but he thinks that not disclosing fees
clearly is the bigger issue. "They are deliberately
obfuscated. They are simply not disclosed." He says, "[When
providers offer a returns statement] it is always net of
fees, and there is no disclosure of what the fees
were."
top
"I Was Stunned"
Even before the mutual fund scandal, Contec began
looking more closely at the 401(k) plan's fees and results.
Thrower cites a variety of troubling practices uncovered as
indicators that its provider could have served participants
better: They include high fees, hidden fees, requirements
to select a certain number of proprietary funds, barriers
to accessing low-cost retail mutual funds, required use of
advisor-class funds, and low returns on conservative
fixed-income investments. Contec could never get the exact
cost of certain fixed-income products from its existing
plan, for instance, but figured out that the annual net
after-fee returns consistently averaged as much as 1.5%
lower than comparable products offered by retail mutual
funds.
When Alliance was implicated, Thrower says, "That
confirmed what I already suspected, which was that the
funds were not being managed in our best interest or in our
employees' best interest. We were very concerned, and we
immediately got hold of our broker and said we were
definitely going to drop Alliance." The search started in
September 2003. Thrower was the point man in the selection
process, working with the company's four-member 401(k)
committee. The committee considered three avenues:
insurance/ annuity-based providers, brokeraged mutual
funds, and retail mutual fund providers. It was an
enlightening search process: One salesperson doing a
presentation said that Thrower was the only person who had
ever challenged him on fees. "I was stunned," he
recalls.The insurance-based companies got eliminated pretty
quickly, based on not disclosing fees clearly, Thrower
says. For instance, after a presentation from one insurance
company provider, Contec asked for performance and fee
information and was given a documentwhich he says
ironically was labeled "Fees: A Simplified Approach"that
contained 55 separate footnotes explaining performance and
how fees were applied, but the performance numbers
displayed excluded many of the fees. Contec gave its AXA
Advisors, LLC, broker another shot at the business, too,
along with other brokers. "We had a very good relationship
with our broker," he says, [but a price/returns comparison
found that] the non-retail funds just across-the-board
lagged."
In one case, a brokered mutual fund candidate responded
to Contec's request for fee and performance information by
faxing a note that read, "Compliance will not allow us to
do any more than what you are receiving." That left retail
mutual fund providers. The company only considered three,
all with strong brand names: The Vanguard Group, Inc.;
Fidelity Investments; and T. Rowe Price. The company gave
each of the three a list of the types of mutual funds it
wanted in its plan.
The suppliers all gave Contec information about the funds,
their performanceover one, three, and five yearsand the
fees. Then Thrower did a comparative analysis. Each
provided "excellent" information about fees, Thrower says,
and they were in a "pretty close" price range. "All three
of the retail mutual fund companies were significantly less
than what we were paying. There was very little difference
in these product offerings," Thrower says. "Our group would
have been happy with any of those three." However, T. Rowe
Price got the nod in November 2003. "It came after us a
little stronger in wanting our business," Thrower says. It
also had higher survey ratings in some areas, such as
Web-based training of participants.
Under the new deal, the plan's fees are "very, very
clear," Thrower says. "T. Rowe Price charges us a flat fee,
and it will be the same for the next three years. The only
other costs are the normal mutual fund expenses, and they
are the same as if the participants went out and invested
on their own." Contec wanted some lifestyle funds and some
less-aggressive mutual funds in its plan, to match its
workforce's demographics. "We have a less-than-average
level of education in our workforce," he says.
Now, the plan has 13 funds, all from T. Rowe Price. That
includes four lifestyle fund and nine individual mutual
funds: U.S. Treasury Intermediate, Capital Appreciation,
Growth Stock, Mid-Cap Value, Mid-Cap Growth, Small-Cap
Value, New Horizons, International Growth & Income, and
a stable value fund that is not offered to independent
investors.
The company told employees about the decision right
after it selected T. Rowe Price. "We announced to people
that changes were coming in the 401(k) plan," Thrower says.
"[At the same time we announced the provider shift,] we
also told them that we wanted to increase our contribution
to the 401(k) plan. So, we had some good news to give to
employees." As of January 1, the company changed its match
to 100% of the first 3% of employee contributions, then 50%
for each additional 1% contributed up to a total employee
contribution of 5%. Prior to that, it matched 50% of the
first 6% of contributions. Later, Contec brought in T. Rowe
Price to help do educational sessions for groups of 20 to
30 employees. The company's human resources director
started off the meetings talking about the higher matching
and provider change. Then, Thrower spoke more about the
provider change. "I said, 'Essentially, here is what
happened: We think that the fees were too high, and that
was coming out of your pocket. We think we can do a better
job for you, and you may have heard about the mutual fund
scandals. Our provider was caught up in that. We do not
like that, so we are making a change.'" A T. Rowe Price
representative then talked at the sessions, which ran
one-and-a-half to two hours each.
Months later, Thrower likes the new setup. "I think what
we have done has given employees better-performing funds
with lower fees, particularly on the fixed-income side," he
says. "Conservative [fixed-income] investors are earning 3%
and, with the old fund provider, they were getting 1.5%.
Now they get less than 0.5% in fees taken out. It sounds
like peanuts, but it is not, especially when it is
compounded over their investing life."
top