Flat-Fee 401(k) Plan Found to be Hard Sell
April 23, 2001
Convincing companies to become sponsors of new 401(k) plans can be an extremely difficult task. That is a concept that Persumma Financial of Newton, Mass., part of the MassMutual Financial Group, should understand well.
Early this year, Persumma introduced a first of its kind online 401(k) plan that uses a flat-rate monthly fee schedule rather than the traditional asset-based fee structure. The service has attracted considerable attention but has had only moderate success in attracting new clients, according to Spencer Williams, CEO of Persumma.
"The reaction [to the new service] has been, I'll say, interesting," said Williams. "I will not say that it has been a complete success ... 401(k) has been priced on an asset basis for the last 15 years, so everybody isn't comfortable with it right away. However, I think the theoretical or intellectual response has been overwhelmingly positive."
Persumma announced the signing of its thirteenth client last Wednesday. Winning 13 clients may be more of a success than it sounds because of how difficult it is to convince companies to change plans, even for a unique one like Persumma offers, according to David Wray, president of Profit Sharing/401(k) Council of America of Chicago. It can be very difficult to judge the impact a new plan will have on the marketplace this early, he said.
"Getting plans to switch over to things like this is slow going," said Wray. "Companies are very cautious. They go through long periods of review."
Persumma's plan charges participants $12.99 per month instead of a percentage of assets as conventional arrangements do. With most conventional plans, employees pay between one percent and 1.5 percent of their total assets for administrative expenses and investment management fees, so the more an individual saves, the more they have to pay, according to Williams.
"The fee transparency of [Persumma's] approach is clearly something that is different," said Wray. "In most cases, the fees are submerged in the overall assets themselves and not so clearly differentiated."
The transparency is particularly important because of the nature of the plan provider business, according to Williams. Charging a flat-fee for particular services is a more reasonable approach and is something investors were looking for, he said.
"It fits very well in the business in the sense that a large part of the value of a 401(k) is service - in the form of advice, investment options, brokerage, statements, voice response, Internet access, etc. - and it made sense to us that services would be paid for in dollars, not in basis points," said Williams.
Persumma estimates that an employee with an account balance of $47,000, the national average, would pay 26 percent less annually for his plan if he used one of the model portfolios it offers through Morningstar of Chicago.
That qualification brings up another reason the new plan may be a difficult sell, said Wray. The savings are dependent on what sort of investment options participants use, he said. Persumma offers four different rosters of investments, according to Pat Collins, a spokesperson for the company. Employees can choose from three actively-managed and three passively-managed portfolios from Morningstar; a group of core funds selected to meet the individual company's profile; virtually any fund in the market using Morningstar's ClearFuture retirement planning advice engine; and, beginning July 1, individual securities through a partnership with Ameritrade of Omaha, Neb.
"The cost savings depends on the investments [investors] are choosing because they still have the asset management fee embedded in a mutual fund," said Wray. "But [this plan], depending on your choices of funds, can clearly be less expensive to basically cover your administrative costs. It provides the potential. If you want that highly leveraged South East Asia fund with 150 basis points, it isn't necessarily going to be cheaper than the person who wants a balanced equity fund with 40 basis points, but it gives people potential of really cutting fees they pay on the plan."