These comments are in response to the discussion thread regarding the Montgomery County Public Schools (MCPS) educational web site designed and maintained by Bwise Guys. First, my name is John Kevin, I am the investment officer and plan administrator for the MCPS 403(b) and 457(b) plans. My phone number is 301.517.5822, if anyone would like to discuss my comments please feel free to call me.
MCPS, a k-12 employer, located in Maryland realizes that employer provided education regarding its two dc plans, while comparable with other k-12 employers, has historically been very limited. MCPS has always published a brief Q&A regarding the plans and listed vendor contact information. In evaluating its dc plans during the past few years and recognizing that the IRS is placing an increased burden on employers regarding these plans going forward MCPS has been looking for ways to provide a clear, consistent message regarding these plans which is available to all employees. MCPS has almost 30,000 employees eligible to participate in these plan, we have over 200 work sites through out the counties 495 square miles. Our employees work 24 hours a day at multiple sites and for a fair number English is not their native language. The demographics of this employee population present a challenge when it comes to educating them on what I refer to as a “costless benefit.” This costless benefit is because the employer is not contributing to participant accounts. MCPS merely acts as a conduit for payroll contributions. MCPS currently has nine approved dc plan vendors whose service models include both on-site representatives and direct-to-consumer model. To date, MCPS has relied on vendors to provide education regarding these plans to our employees. The majority of that education is via a one-on-one session with a financial advisor and MCPS has no idea what is being communicated to the employee. Firms that market direct to the consumer typically provide no education to our employees.
MCPS, as part of its most recent vendor RFP, required companies to contribute on a pro-rata basis (assets under management) to pay for the development and maintenance of an educational web site dedicated to our dc plans. Why did MCPS choose to pass this cost back to the vendors? A number of reasons, first, MCPS does not have the resources (staff or money) for this type of endeavor. Second, the pricing structure of dc plan investments allows for such funding. Let me explain using Fidelity as an example, MCPS has $164 million in participant assets with Fidelity Investments across 1,900 accounts. The average account balance is $86,000. Fidelity, and every other company, applies an expense ratio to its mutual fund assets. The expense ratio pays for fund management, custodian services, auditors, shareholder reporting and “administrative services.” When Fidelity reviews a dc account they look at average account balance, when the average account balance is say, above $50,000, the account is profitable for Fidelity. Fidelity, when it bids for a dc plan knows that it will incur some cost to educate the participants regarding plan. In the 401(k) world this is done via group meetings in which a participant education consultant from Fidelity flies in stays in a ######el and reviews the plan, investment options and how to enroll for groups of employees. Plan size and profitability dictate to Fidelity if they will offer 10 hours or 100 hours of employee education as part of their bid. MCPS knows that Fidelity does not provide group meetings to our employees, however they have an “education budget” built into their proposal. MCPS, by asking Fidelity to pay for part of the web site, is merely capturing these education dollars which would otherwise be lost and merely additional profit to Fidelity. Now consider the same scenario for companies that offer annuities, the costs are typically higher due to the M&E fee so the average account balance profit threshold can be lower. The fact that MCPS is requiring vendors to reimburse part of the education budget in dollars versus in-kind service is irrelevant. The vendors are not adding hidden fees to our participant accounts because the only fees that apply are the underlying fund expense ratios and the stated M&E fees. Only one vendor still charges a custodial fee of $25 per year, all other companies dropped the fees knowing full well they were going to be sending MCPS a check for the web site. Third, who stands to profit from a successful web site? MCPS? No, the vendors are going to profit if participation increases. The vendors view the cost as a small price to pay for additional, unbiased, promotion of the plans, the promotion of which never before existed.
MCPS issued an RFP last fall searching for a vendor to develop and maintain the web site. One dozen companies requested the RFP and based on responses MCPS choose to work with Bwise Guys for an initial two year period. MCPS controls ALL content on the site and Bwise Guys cannot take any direction from vendors regarding the content. Not one vendor has complained about the content on the site because it is unbiased to vendor and products. MCPS is promoting the web site internally which again helps raise the profile of these plans. There is no link from the MCPS web site to 403(b) Wise for which traffic is driven. The only link is from the MCPS employee web site.
This web site is an experiment, MCPS is trying to increase its participation rate, which is currently at 51% for full time employees, and this is one tool we are using. MCPS does mail out universal availability notices to 30,000 each year and this cost is borne solely by MCPS.
This discussion board seems to be an untapped resource of experts. I challenge anyone reading this to call me with a solution to our education dilemma. The answer is not financial advisors; do the math, 30,000 employees’ and nine vendors. Three of the vendors are direct-to-participant, the other six offer representatives. If the six try to provide one-on-one education to our employees that results in 5,000 meeting each year and that doesn’t include the meetings advisors should be having with existing clients. Financial advisors attempting to educate large employee populations are one major flaw I see in these plans. The employer must be involved and that is what should begin to occur with the new regulations and via sites like the one we use.
As employers realize these plans are going to cost them money to administer they will be reviewing all aspects of the plans. Everything should be on the table, # of vendors, products offered, group instead of individual contracts, and importantly what education solutions are being offered and suggested by the vendors. My experience is that the vendors prefer the status quo on all of these issues. Reducing the number of vendors increases the leverage of the employer to demand pricing concessions and service improvements. Product offerings are already shifting, a number of company that historically offered annuity contracts have changed, without being prompted, to a mutual fund program. Group contracts again change the leverage from vendors to employers and will ultimately make these plans more attractive in the future. Attractive in the sense that employers may control the assets and be able to move them to another company if there are no surrender costs involved. These plans will look more like 401(k)’s but it will take 5 – 10 years. Group contracts with no surrender charges or restrictions are what employers should be demanding now.
Let’s not forget that most k-12 employees are covered by a pension plan (DB) and our also receive social security. These dc plans are truly supplemental and play a very different role than a 401(k) plan for for-profit sponsors with no other retirement plans. Our employees only need to save enough to replace between 20-30% of the final income since the other two sources already exist.
MCPS’s experience is that you don’t need to reduce vendors to improve the plans for employees. Product concession are available to an educated consumer, it is incumbent on k-12 plan sponsors to become that consumer. Ultimately everyone needs to remember these plans are for the benefit of employees and nothing else.