Providing For Participants
(pg. 2/2)

With the 401(k) asset base growing, as noted above, mutual fund houses, insurance companies and banks began to offer "full service" to plan sponsors. These providers attempted the difficult task of "bundling" the services and delivering a very broad spectrum of investment, trust, recordkeeping, and plan services to plan sponsors who were attracted by the appeal of "one stop shopping." Many companies enticed consumers by offering "free" recordkeeping and employee communication materials. Although the plan sponsor was able to reduce costs for the employer, the costs were essentially shifted to participants via a reduction in the return on their assets. It is now commonplace for these fees, as well as fees for investment management, to be assessed as a percentage of assets invested.

In the last several years it has become clear that delivering consistently high quality in all areas is extremely difficult. Unlike the plan sponsor who purchases participant recordkeeping, trustee, equity and stable value management services on an unbundled basis, the plan sponsor who selects a full service provider cannot readily dismiss one component of the "package" that fails to deliver while retaining the other components. This was especially true early on when plan sponsors were faced with an "all or nothing" offer from the full service providers. However, when faced with a faulty piece of the package, plan sponsors grew concerned about their fiduciary responsibilities and applied pressure to full service providers to permit the use of outside vendors, primarily for investment funds. Currently, many full service providers permit the use of outside investment options. Retaining the right to bring participants the best returns with an attractive fee structure is especially important due to the fact that the growth of a participant's account balance is the net result of contributions and investment earnings, minus fees and expenses. As such, plan sponsors must provide appropriate investments at reasonable cost which can be accomplished with flexibility in the design of their programs.

As plan sponsors continue to take a closer look at the performance and services provided and the effect of fees on participants' account balances, we expect that the trend will continue to move toward some form of unbundling and flexibility for plan sponsors. In many cases, the participant bears the cost of the plan, via a reduced return, consequently, there is no additional cost to the plan sponsor to unbundle the program and better fulfill their fiduciary obligations. In fact, unbundling investment options regularly results in providing participants with better suited investment options at a reduced cost. Furthermore, unbundling is transparent to participants and can be operationally seamless for the plan sponsor.

Pg 2/2.