The Empty Value Propositions of 401(k)s Offered Through PEOs and Online Solutions

We launched the Tech MEP in 2016 after six years of exploring the 401(k) landscape. Our research started in 2010 and included platform demos, conversations with multiple industry providers and survey feedback from over 100 employers. We learned that existing 401(k) solutions fell short for several reasons. The top reasons for employer dissatisfaction were:

• Online solution had poor customer service
• Online solution did not scale in price 
• Plan design limitations prevented business from achieving its benefit goals 
• Sub-standard fund performance
• Hidden fund fees 
• Expensive service providers 
• Difficult and costly set-up 
• Payroll integration was an “oversold” feature
• User platform was “oversold” feature 

The greatest driver of long-term satisfaction was dedicated and responsive customer service. Being able to pick up the phone and speak with experts who work on the retirement program was most desired. 

“Having that human touch, being able to call customer service and always get the same person is a good feeling,” Robert te Winkel, WTIA’s CFO who is also a member of the Tech MEP, said. “Before [joining the Tech MEP], I had to call a 1-800 number and always got a different person, so I had to explain myself and give them my client code number every time.”

According to our research, responsive customer service included the ability to contact program administrator representatives directly and to have access to an in-house HR professional to help with plan design, discrimination testing and the overall delivery of the 401(k) benefit to the participants. Essentially, employer administrators wanted a “partner” to help them deliver and manage the 401(k) benefit. The advisor role was not best suited to do this because their expertise lies in investment management, not HR management.

“Angie Hopkinson and Grant Prokop have both been very reliable sources,” added HR Manager Mark Peck, in reference to WTIA’s 401(k) program managers. His company, Emergency Reporting, joined the Tech MEP earlier this year. “They’ve both been responsive and able to resolve any issues I’ve had.”

The other huge driver of long-term satisfaction was ease of set-up and scalability. PEOs and online solutions tout ease of set-up but we found that these solutions all had set-up costs and offered limited flexibility with plan design and investment choices. The limitations in plan design had a very serious impact on the delivery and value of the 401(k) as organizations scaled.

From a fund-line up perspective, PEOs and online solutions “sell” the cheap cost (expense ratios) of the funds. What we learned is that there were often hidden fund fees not disclosed. Even more important, the limitations in fund choices and requirement to use funds from the same financial institution yielded consistently sub-par performance when benchmarked against comparable fund classes. Yikes!

Lastly, the pricing model of PEOs and online solutions didn’t scale. As organizations approached 50 employees and had more than $1m in plan assets, these solutions were no longer competitive from a cost standpoint. 

So …. why did the employer decide to join PEOs and online solutions in the first place?  

Online solutions like Guideline, Human Interest or PEOs like ADP tout payroll integration and slick user platforms as a core decision-making driver. They use administrative fear as a tactic and assert that payroll integration will solve the accounting department’s pain of managing a 401(k). In practice, this was simply not the case.

“When you’re a busy person inside an organization, no matter how big or small it is, and you have no one but yourself to manage 401(k)s, it can be very stressful,” said Michelle Ferris, director of finance at AllStar Directories.

The time savings of payroll integration was dwarfed by the additional time spent on dealing with plan design limitations, failing discrimination tests, managing fiduciary responsibility of obtaining insurance, bonds and reviewing investments, and tracking down service professionals to help address issues and inquires. 

“Now I can focus on other things, because [the MEP] removes many activities from my plate,” te Winkel said.

So…what about the sought-after user friendly and slick-user platform? What we found is that 95% of participants will not go to the platform after initial enrollment. Said another way, most participants choose funds and a deferral percentage and leave it alone.

“With the MEP, our employees don’t have to do anything to get enrolled,” said Ferris. “All they have to do is make a payroll contribution.”

“It’s easy to navigate the site,” said te Winkel. “And as an employer if I have questions about the platform I can call customer service and connect with someone very quickly.”

For the smaller population of participants that actively manage their 401(k), the basic functionality of changing investments and deferral rate was available and easy to use in all platforms we reviewed. As well as having a direct contact, Jason, who can walk you through how much you should be investing, which investment choices are right for you, and if you’re saving enough for retirement. 

These “game-changing” features were, in fact, not game changers at all. 

So… If I am an employer, what should I do?

The Tech MEP was specifically created to address the pain points and challenges employers experienced with PEOs, online solutions, and advisor-led programs.  Our Tech MEP is the first retirement program that was specifically designed and tailored for technology and professional service employer groups. The program leverages the collective buying power of a bona-fide trade association to deliver a solution to the marketplace not available elsewhere. For our members, making the switch is a simple process.

“It was a really easy transition for us,” said Ferris. “The website is better, the customer service is better. We didn’t realize how not good we had it until we switched over.”

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