Smaller 401(k) Plans Happy With Their Providers

October 6, 2003 ( - The majority (65%) of small market 401(k) plan sponsors are satisfied with the overall performance of the companies managing their plans.

The satisfaction levels for the small defined contribution plans – those plans with under $5 million in assets – were also found to be only slightly less than larger sponsors with their “provider relationships” (68%) (See 401(K) Sponsors Are Happy With Their Providers ). This suggests that the smaller market may have found a service model that balances its own operational cost issues with sponsor needs and expectations, according to research from the SPARK Research Group.

The small market is still being catered to though the services of plan coordinators and the intermediaries, evidenced by the fact that both the smaller and the larger market had the same level of “Value for the Dollar” and “Commissions Paid to Brokers” satisfaction.

Other differences, and lower satisfaction levels, were noted in the more frequent use of intermediaries for the smaller 401(k) plan. SPARK attributes the dip in approval ratings to the fact that a third of the plans do not have an intermediary visible and providing service. Also lower among the under $5 million plans approval levels, albeit slightly, was satisfaction with the participant Web site. In both segments, the recordkeepers’ proprietary funds are holding onto about 60% of the plan sponsor’s assets.

Conversely, the smaller segment had higher levels of satisfaction with respect to:

  • employee education
  • telephone representatives
  • participant statements
  • voice response units.

On even footing between the two strata of plan sizes were comparisons for plan administration service satisfaction scores in “record keeping services” and “investment performance” categories. However, small plan sponsors are somewhat happier with the service quality of their Employee Retirement Security Act (ERISA) providers. They are slightly less satisfied than their larger plan counterparts when it comes to plan sponsor Web sites.

Also similar among the two sized plans were the average number of investment options at 14. The proportion of assets allocated to equity is roughly half, as in the larger segment.

Greater presence of intermediaries among the smaller plans also equated into lower loyalty figures for the small plan's recordkeeper. While two out of three larger plans identified themselves as "highly loyal" to their recordkeeper, only one out of three smaller plans fall into the same category. SPARK attributed this to the personal relationships that drive loyalty tend to be stronger with the intermediary who is servicing the plan daily and is often onsite than with the recordkeeper.

Further supporting this contention, the survey examined turnover rates in the past 12 months. Compared to plans with assets greater than $5 million that had a recordkeeper turnover rate of 7%, the churn rate among smaller plans was much higher, at 12%. As a silver lining, though, the survey found the turnover for the next year may be far slower, since only 3% of smaller plans were in a formal search at the time of the interview and only 5% said they plan to conduct a formal search in the next year.

SPARK also found smaller plans are only half as likely to offer their employees both a defined benefit and a defined contribution plan. However, those companies that do offer both plans are almost three times as likely to use the defined contribution recordkeeper to administer their defined benefit, with those who have combined the two plans with one recordkeeper reporting a high level of happiness with the defined benefit service quality they are receiving.

Plan Cross Section

Even though the number of investment options may have been equal among smaller and larger plans, where the money is going takes a divergent path. For instance, company stock is only offered as an option by about one out of nine smaller plans. However, when company stock is offered, the concentration of plan assets in company stock is very high and much higher than for larger plans.

Additionally, smaller plans are more likely to offer a Self-Directed Brokerage Account (SDBA) and not surprisingly, the percentage of plan assets invested through the SDBA is far larger among smaller plans.

More prevalence was also found in smaller plans to offer advice and guidance to their participants. Further, the advisor is more likely to offer it through a financial planner as opposed to the Internet.

However, larger plans are likely to catch up to the smaller plans, as future adoption rates of advice programs are much weaker among the smaller plans as compared to the larger segment, SPARK concluded.

The cross-section of 1,365 plan sponsors, conducted in August and September of this year, profiles 21 major providers active in the small plan market. Plans with at least 5 participants were included. More information can be obtained by contacting Jeff Close at (860) 658-5058.