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More Vigilance Urged for Plan Sponsors

Only defined contribution plan sponsors at large companies with 1,000 employees or more tend to be knowledgeable and aggressive about selecting and monitoring their employees' retirement plans, according to a consultant to plan sponsors.

However, 401(k) plan participants are beginning to ask their sponsors to hold their defined contribution providers up to higher standards, said the consultant, Trisha Brambley, president of Resources for Retirement Plans, of Newtown, Pa. Because of the increasing demands of participants, plan sponsors' sophistication about their 401(k), 403(b) or other defined contribution plans will rise, Brambley said. Fund companies that want to expand their 401(k) business will have to become mindful of this increasing sophistication at the sponsor and participant levels, Brambley said.

As a retirement plan consultant to plan sponsors at firms with anywhere from 100 to 6,000 employees for the past 15 years, Brambley should have a sense of what sponsors look for when selecting a 401(k), 403(b) or other defined contribution plan. Rarely do sponsors properly conduct a request for information or due diligence phase when selecting a plan, she said. And, once they have a plan in place, only a few regularly monitor performance and fees of the funds in their plans, she said.

A recent study on plan sponsors conducted by Greenwald & Associates of Washington, D.C. confirms Brambley's findings. (MFMN 10/4/99) The study found that only 35 percent of plan sponsors formally evaluate the performance of their plans and only 40 percent monitor whether the mutual funds in their plan are adhering to their stated investment style.

Julie Jason, a keynote speaker at the Profit Sharing/401(k) Association's annual meeting in San Diego, Calif. last month, said that top management may be too casual when it comes to selecting investment options for their employees.

"How some companies perform this function may surprise you," said Jason, a 401(k) consultant to plan sponsors at Jackson, Grant & Co. of Stamford, Conn. Many chief financial officers simply choose a well-known mutual fund company, funds which have been awarded five stars by the mutual fund publishing firm Morningstar of Chicago, or funds that have established brand recognition through advertising campaigns, she said.

"Many companies don't know where to go for help [on selecting a 401(k) plan] and don't understand how different they are," Brambley said. "What usually happens is the chief financial officer, even at a big company, will pick three vendors that he knows, such as Fidelity, Vanguard and Mass Mutual, and then pick one for unscientific reasons. It should be a much more thorough process t

han that."

The bull market has not improved plan sponsor vigilance, Brambley said. Because returns have been so good during this prolonged bull market, sponsors are even less predisposed to ask hard questions of their plan sponsors, Brambley said.

"We have been in an economic environment where everything has done well . . . and looking carefully at 401(k) plans does not seem so important," she said.

On the other hand, the bull market is having the reverse effect on individual investors. The euphoria over the financial markets has attracted more and better educated investors to the market. Now that plan participants are becoming more knowledgeable, they will probably drive a change at the plan sponsor level, she said. Plan participants are now asking sponsors to do a better job of running their defined contribution plans, Brambley said.

In addition, the balances plan participants have in their 401(k) plans have grown to levels where participants have no choice but to become more involved in their investments, Brambley said.

When you have nothing, you have nothing to lose," she said. "But, when you have an account balance of $50,000 to $60,000, it is important" to manage your money wisely, she said.

These better educated and more highly-motivated plan participants will force plan sponsors, probably over the next five to 10 years, to become more discriminating and demanding about performance, style adherence, fees, administration, participant communication and education, Brambley said.