When the Society of Professional Administrators and Recordkeepers, also known as Spark, surveyed plan sponsors last summer, it expected to confirm the prevailing belief that big employers are more satisfied with the recordkeeping firms that handle their money management and administration than are small companies.
Spark got its anticipated result but was taken aback by how wide the satisfaction gap was. The group found that only 35 percent of small retirement plans, which it defines as those with fewer than 250 participants and less than $5 million in assets, were “highly loyal” to their pro-viders. By contrast, big plans had a 62 percent loyalty rate.
Recordkeepers can pay a price for a fickle customer base. Twelve percent of small plans changed recordkeepers in 2002, compared with only 7 percent of big ones.
The data was gathered in two telephone surveys, one canvassing 1,600 large plans in July and another focusing on some 1,400 small plans in August and September. Spark won’t reveal the identities of the recordkeepers, but they include the top 20 vendors in both the small-plan and big-plan markets.
Why are small plans so unhappy? It’s not primarily because of weak returns. After all, big- and small-plan participants invest in many of the same mutual funds. The survey showed that 25 percent of big plans and 24 percent of small plans were “highly satisfied” with their managers’ investment performance.
The problem, says Warren Cormier, co-director of Spark’s research group, is that half of all small-plan sponsors don’t deal directly with the fund company that runs their money and administers their plan. Instead, they work with an intermediary, such as a broker or an investment adviser. Fund companies often subcontract small-plan administrative work because it is not cost-efficient for them to directly service a horde of tiny accounts. The savings amount to a mixed blessing: When small-plan sponsors do appreciate good service, they credit the intermediary, not the recordkeeper.
But what happens when the intermediary doesn’t provide the service it’s supposed to provide, which respondents re- port happens about 30 percent of the time? Small plans blame both the intermediary and the recordkeeper.
There’s another reason small plans are more likely to switch recordkeepers, says Richard Koski, a principal at Human Resources & Investor Solutions, the HR consulting arm of Mellon Financial Corp.: It’s not hard to do. “For a large plan, it’s a major endeavor,” says Koski. “A small plan has a lot less data. You can do it all on a spreadsheet.”
Dealing directly with a recordkeeper can often make a difference to a small-plan sponsor. CEF Industries, an Addison, Illinoisbased manufacturer of elec- tromechanical systems, is a case in point. CEF has been using Principal Financial Group to administer its $4 million 401(k) since 1984. Treasurer Charles Novak says he speaks directly with his Principal representative about most retirement plan issues. Once a year the Principal repre- sentative visits the company. “I don’t feel that I’m treated any differently because of our plan’s size,” Novak says.
For most money managers, says Koski, “you’re not going to start generating econ- omies of scale with plans of under 250 people.” If those firms want to continue using intermediaries, the solution may be more oversight and training of their subcontractors, says Spark’s Cormier.
“When money managers use an intermediary,” Cormier adds, “they must realize that they are placing their brand image in the hands of a third party.”
