The Center for Due Diligence - 401k Planning, 401k Analysis

5/10/2005

Hancock Retail Plan Program

DC Plan Programs

Retail: Quasi-Bundled, Group Annuity, In-House Recordkeeping On Proprietary Apollo System, Adm/Documentation Via Any Local TPA, Wrap Fees, Unbundled Commissions, Separate Accounts Investing In Retail Mutual Funds

Venture: Quasi-Bundled, Group Annuity, In-House Recordkeeping On Proprietary Apollo System, Adm/Documentation Via Any Local TPA, Wrap Fees, Unbundled Commissions, Separate Accounts Investing In Sub-Advised Funds

Venture B-D: Quasi-Bundled, Group Annuity, In-House Recordkeeping On Proprietary Apollo System, Adm/Documentation Via Any Local TPA, NAV @ $1 Million, Bundled Commissions, Separate Accounts Investing In Sub-Advised Funds

Retirement Select: Unbundled, Registered, Recordkeeping Outsourced To DST, Adm/Documentation Via Any Local TPA, NAV, Bundled Commissions, Retail & Sub-Advised Mutual Funds, Requires $3 Million

Hancock provides services to DC plans only and all four of their programs benefit from noteworthy sales support, local service, onsite enrollment, bilingual support, strong communication/education packages and open architecture within a fixed menu.

All the Hancock programs are sold in conjunction with local TPAs and proprietary fund requirements, GIC requirements, CDSCs (assuming no market value makeup) and commission recovery do not apply to any of the programs.

The Retail, Venture and Venture B-D Programs are unregistered group annuities sold on a quasi-bundled basis. The Retirement Select Program is a registered program sold on an unbundled basis.

The Retail and Venture Programs are marketed with unbundled commission flexibility and wrap fees. The Venture B-D and Retirement Select Programs are offered at NAV and include fixed/bundled commissions.

The Venture and Venture B-D programs are teamed with sub-advised funds while the Retail Program offers name brand mutual funds. The Retirement Select offers both name brand mutual funds and sub-advised mutual funds.

All four programs offer brokerage options without threshold or core fund requirements (assuming no loans are outstanding) and plan level wrap fees do not apply to brokerage assets. Multiple source brokerage through TruSource is available to the Retail and Venture Programs, but the Retirement Select is limited to SSBSI.

The Retail, Venture and Venture B-D programs require only five lives and $50,000 in first year contributions, but the Retirement Select requires $3 million.

Hancock is selling well and inching upmarket, but their average sale is still below $1 million. The Retail Program is currently capturing about 80% of new business, but the Venture Programs are more competitive below $2 million. The Retirement Select was rushed to market, is not selling well and a major overhaul is expected.

The Retail Program is an unregistered group annuity available to plans with five lives and $50,000 in first year deposits.

Hancock provides the recordkeeping in-house on the proprietary Apollo system, but the quasi-bundled program can be sold in conjunction with any local TPA. Hancock’s electronic linkage, backroom efforts, marketing and support/training are also widely recognized as the benchmark for small TPA programs.

The program offers a prudently select menu of name brand “A” type share mutual funds with above average performance and unbundled commission flexibility, but wrap fees apply. The average non-weighted expense ratio of the menu is, however, a competitive 1.13%.

The menu includes about 80 funds from 28 families, including 5 American “R-3” share funds, but proprietary fund and GIC requirements do not apply. Sponsors may also offer the entire menu without additional cost.

The programs include a successful series of Lifestyle funds, a rebalancing service, a pooled GIC fund alternative and multiple source brokerage from TruSource (formerly CNA Trust).

In addition to wrap fees, short-term redemption fees may apply to some of the funds, but the program is offered without plan level CDSCs, prospectus NAV requirements, prospectus CDSCs and commission recovery.

The Retail and Venture Programs have different cost structures and the Retail Program is somewhat expensive when offered to plans with less than $2 million. In addition to the underlying fund expenses and wrap fees, TPA fees apply. Plans with less than $1 million may also incur additional fees.

Base pricing includes local service, liberal onsite enrollment, sales support, bilingual support, unlimited funds, open architecture, a strong communication/education package and a relationship manager at $3 million.

Additional fees would apply to the optional trustee services, online advice and the brokerage option.

Share Class Availability

Separate Accounts Investing Primarily In “A” & “R-3” Type Shares, But Wrap Fees Apply To Retail Program.

NAV Requirements

NAV Requirements Not Applicable, But Plans Less Than $1 Million Incur Additional Fees.

CDSCs Applicable to NAV& Other Purchases

CDSCs Do Not Apply To Any Funds (Assumes No Market Value Make-Up), But Prospectus Short-Term Redemption Fees May Apply.

Program Requirements

5 Lives & $50,000 In First-Year Deposits.

Wrap Fee/Asset Charge

Yes, Wrap Fees Primarily Determined By Dial-In Advisor Compensation.

Funds Available At Plan Level

Unlimited.

Proprietary Funds Available To QP Sponsors

Menu Includes About 80 Funds From 30 Families, But Proprietary Funds (May Be Sub-Advised), Including 5 Lifestyle Funds, Total About 20% Of The Menu.

Proprietary Fund Requirements

None.

Fixed Income (GIC Type) Option

Optional.

Dated & Less Than Competitive General Account Group Annuity.

Alternative Morgan Stanley Stable Value Fund.

Invests Primarily In Fixed-Income Securities, Intermediate Duration Securities, Cash & Benefit Responsive BV Liquidity Agreements.

Collective Trust.

0.95% Expense Ratio Before Wrap.

Benefit Sensitive & Transfer Responsive At BV For All Participant Level Activity.

Competing Fixed Funds Not Allowed (Targeted Duration Less Than 3-5 Years).

Plan Discontinuance Subject To 12-Month Put.

Non-Proprietary Investment Flexibility

Separate Accounts Investing In Retail Mutual Funds.

80 Funds/30 Families:

AIM 4

American Century 1

American 5

Calamos 1

Davis 2

Domini 1

Excelsior 1

Fidelity 1

Fidelity Advisor 3

Franklin Templeton 7

Hancock* 2

Jennison Dryden 1

Lord Abbett 2

Manulife 5

MFC Global* 10

MFS 3

MLIM 1

Morgan Stanley 2

Munder 1

Oppenheimer 2

PIMCO 5

Royce 1

SaBAM 1

Scudder 3

Smith Barney 2

SSgA 1

T. Rowe 7

UBS Global 1

Vanguard 3

Weitz 1

*Proprietary.

S&P Approved Fund Selection Process.

Mostly “A” & “R-3” Type Shares.

Non-Weighted Average Expense Ratio Of 1.13%.

No Alliance Fund Threshold Or Overt Costs

No NAV Requirements Or Prospectus CDSCs.

Prospectus Short-Term Redemption Fees May Apply.

No Proprietary Fund Requirements.

Wrap Fees Apply To Equalized Commissions.

Communications & Marketing Material By Hancock.

Direct Selling Agreements Not Required.

Self-Directed Brokerage

Multiple Source Brokerage Available From TruSource (Formerly CNA Trust).

Specifics Not Reviewed, But Threshold Requirements & Asset Transfer Restrictions Do Not Apply (Assumes No Loans Outstanding).

Plan Level Wrap Fees & Commissions Do Not Apply To Brokerage Assets, But $25 Account Set-Up, $120 Annual Maintenance & 0.10% Market Value Fees Do Apply.

TruSource Accommodates Asset Classes Not Generally Offered By other Brokerage Providers.

Company Stock & Outside GICs

Integrated NQDC Augment

VRU & Live Operator Services

Internet Services

Most Commonly Used "" Share Proprietary Funds In Participant-Directed DC Type Plans
Fund Name	Category Objective	Expense Ratio
NA/Open Architecture

The Retail Program is an unregistered group annuity marketed with open architecture via 80 funds from 30 families, including 17 proprietary funds.

The separate accounts invest in name brand mutual funds, mostly “A” & “R-3” type shares, and while proprietary fund requirements do not apply, commissions are funded with wrap fees.

The average non-weighted expense ratio was 1.13% at year-end and approximately 60% of participants use the Manulife managed series of 5 Lifestyle funds.

Fee waivers and reimbursements may apply.

Core Fund Analysis not applicable to open architecture programs.

Broker Commissions/Reallowances ("" Shares @ NAV)
	Finders' Fee		Trail
Asset Class	Amount/Breakpoints	Reset*	Immediate	13^th Month
Equities	1.00% 1st $5 Million 0.75% Next $5 Million 0.50% Next $5 Million 0.25% Next $5 Million	-	-	0.25%
Fixed	Same as above.	-	-	0.25%
M Mkt	Same as above.	-	-	0.25%
GIC	Same as above.	-	-	0.25%
Index	Same as above.	-	-	0.25%
Alliance Funds	Same as above.	-	-	0.25%

Standard commissions shown above, but additional commission flexibility is available through the pricing desk.

*0.50% ongoing finders’ fee part of standard commission option.

No commission tracking problems, CDSCs or commission recovery.

The Retail Program is expensive for small plans and a $1 million Retail plan would incur a 0.70% wrap fee (total investment expense of 1.83%) when teamed with standard commissions. A $5 million Retail plan would incur a 0.21% wrap when teamed with a reduced 0.50% first year finders’ fee and a 0.25% 13th month trail. A $12 million Retail plan would incur a 0.10% wrap when teamed with an immediate 0.25% trail.

As noted, the Venture programs are more competitive for small plans and a $1 million Venture B-D plan would incur a total investment expense of 1.38% when teamed with standard commissions. A $5 million Venture B-D plan would also incur a 1.38% total investment expense, but it would include an immediate 0.47% trail under the new pricing.

Commission Give-Up Flexibility

Yes.

Repeat Producer Program

No Formal Program For Advisors.

Billable Recordkeeping/Administrative Pricing
Base Fee	Per Employee/Eligible/Participant	Trustee Fee
*	*	*

* The Hancock programs are sold on an unbundled basis and TPA fees apply. TPA fees vary, but the average base fee is in the $1,000-$1,500 range and per-participant fees range from $15-25. Per-participant fees decline with assets, but are unlikely to drop below $10. The optional Wilmington Trust fees range from $1,000-$2,500 and the online investment advice service would also incur additional per-participant fees. In addition to the underlying investment expense, commissions are funded with a wrap fee. Additional graded asset charges apply to plans with less than $1 million and plans not using EDT may also incur additional charges. In addition to TPA support, total fees include plan design flexibility, open architecture, meaningful sales support, local service, liberal onsite enrollment, strong education/communications package, bilingual support, recognized customer service and a relationship manager at $3 million. Excess margin pricing policies are under development and could be used to fund RIA, audit, ERISA attorney fees, additional education or anything else deemed to be a plan expense.

Price Discounts
Discounts Apply To	Average Balance	% Discount
*	*	*

Service Guarantees

On-Site Enrollment Services

QP Wholesalers

STRENGTHS:

Large Financial Services Firm With Strong Ratings, Capitalization, Margins & Earnings Growth
Solid Management
Scale
Distribution
Profitable
Committed To Retirement Plans
Committed To Advisors
Sales, Marketing & Packaging Savvy
Knowledgeable & Caring Staff
#1 Small Plan “401(k)” Provider
Inching Upmarket
Growing Faster Than Competitors
Benchmark TPA Program With Further Growth Potential
Ranks Well In Surveys
Sponsors & Advisors More Than Satisfied With Support & Service
Relationship Manager At $3 Million
Best Small Plan Wholesaler Force
Local Presence
Liberal Onsite Enrollment
Strong Bilingual Support
Recognized Education/Communications Capabilities
Committed To Systems Upgrade
Prudent Fund Selection Process (S&P’s Quality Evaluation Certification)
80 Fund/28 Family Menu
Name Brand Retail Mutual Funds Rather Than Sub-Advised Approach (Retail Program)
Above Average Performance
No Proprietary Fund Requirements
No Proprietary Fund Impact On Pricing
No GIC Fund Requirements
Pooled GIC Type Fund Alternative To General Account Option
Successful Lifestyle Series
Rebalancing Service
Unlimited Funds In Base Pricing
Venture & Venture B-D Programs Competitive At $1 Million, But Retail Program Requires More Assets For Competitive Pricing
0.10-0.20 bps Expense Reduction Expected For Plans Over $3 Million
No Threshold, Overt Costs, NAV Requirements Or CDSCs Apply To Any Funds (Assumes No Market Value Makeup)
Multiple Source Brokerage & Investment Flexibility Beyond Normal Brokerage Option
Equalized/Dial-In Commissions (Retail & Venture)
No Fund Tracking Commission Issues
No Commission Recovery
Full Disclosure
Excellent Annual Plan Review
Suite Of Advisor Tools

WEAKNESSES:

Services Limited To DC Plans
Unbundled TPA Only
Annuity/Wrap/TPA Program A Tough Sell At $10 Million
Proposal Is Dated
Support Literature Does Not Correspond To Program Names
System May Need Upgrading
No Spanish IVR Or Website
Mapping Challenges
Generally Sold With Entire Menu
Prospectus Short-Term Redemption Fees May Apply
Limited Share Class & Investment Flexibility Beyond Fixed Menu
Dated & Non-Competitive General Account Guaranteed Fund (Optional)
Retail Program Expensive Under $2 Million
Additional Fees May Apply To Smaller Plans With Low Balances & Those That Don’t Use EDT
Producing TPAs May Compete With Advisors & Undercut Pricing With Revenue Sharing
No Bonus Program For Advisors
No Integrated Rollover/Cross-Selling Strategy
Missing The Opportunity To Annuitize Participant Assets
Plans With Wrap Fees Vulnerable As Assets Increase

SUMMARY

Hancock markets quasi-bundled TPA programs to the small plan market. The unregistered group annuity programs have different cost structures, investment menus and commission flexibility, but Hancock is widely recognized as the small plan TPA program benchmark.

Group annuity programs dominate the small plan market and generally offer more than fund company programs in the small plan market. Unlike other programs with non-proprietary investment flexibility, group annuity programs generally offer open architecture within a fixed menu.

Small plan group annuity programs are also far less problematic from a commission tracking standpoint, a huge problem for advisors.

On the other hand, small plan group annuity programs generally charge more, but it’s important to note that Hancock’s open architecture programs include unmatched sales support, local service, liberal onsite enrollment, flexibility, a solid service model, a relationship manager at $3 million, a strong education/communications package and bilingual support. TPAs also provide an additional level of support.

Unlike the sub-advised Venture programs, the Retail Program offers a menu of prudently selected name brand mutual funds. A pooled GIC fund alternative, a successful series of Lifestyle Funds and multiple source brokerage via TruSource are also available.

The Retail Program is teamed with unbundled/equalized commission flexibility that is funded with wrap fees, but the average non-weighted expense ratio was a competitive 1.13% at year-end. The investment menu has delivered above average performance and while proprietary fund requirements, guaranteed account requirements and CDSCs do not apply, prospectus type short-term redemption fees may apply.

The Venture Programs, particularly the NAV Venture B-D Program, are more competitive to plans with less than $3 million, but a $5 million plan using the Retail Program would incur a total investment expense of 1.34%. The investment expense includes an equalized 0.50% first year finders’ fee and a 0.25% 13^th month trail.

The same $5 million plan using the Venture B-D Program would price out with a total investment expense of 1.38% and include an immediate 0.47% trail, but many small plans prefer retail mutual funds over sub-advised funds.

As you can see, the Retail program is competitive above the small plan market, but the Venture B-D Program may be the most competitive group annuity program available to the small NAV market.

TPA fees also apply, but additional expenses would be incurred by plans with less than $1 million.

CONCLUSION

The retirement industry will be challenged in the decades ahead, but Hancock is already participating in consolidation and growing faster than their primary competitors, a growth streak that should continue.

Hancock benefits from good management, scale, profitability, distribution, sales support, product and they are marketing savvy. Favorable trends within the TPA industry should also benefit Hancock and the TPA community provides a surrogate sales force.

Hancock has always done a good job enhancing the value of their partners and the recent expense reduction should help them move upmarket. Last year’s average sale was slightly less than $1 million, but gaining market share in the $3-5 million market should be relatively easy for Hancock, which would further improve the firm’s profitability.

Hancock benefits from “one-off” introductory type business because they offer a complete package that includes local service, onsite enrollment, TPA expertise and wholesalers that can close deals. Generalist type business is, however, being displaced above the small-plan market.

Given the desire to move upmarket, Hancock would be wise to commit their resources, and the soon to be launched excess margin pricing policies, to elite advisors because they are the path to growth and moving upmarket.

As noted many times, the retirement plans market is maturing and shifting from a growth industry to an industry of consolidation. Like all maturing markets, the industry is facing more competition, more scrutiny, more disclosure and more rules and regulations.

The assets held in retirement accounts are still huge, but demographics aside, the “corporate” sponsored savings vehicle may be starting to disintegrate.

The media and sponsors may never understand it, but few vendors are earning an adequate return or making money on their retirement plans business. Plans need independent advisors and unbiased advice, but most sponsors are not skilled in this area and advisor compensation is an add-on.

Cost is always an issue, but if the sponsor wants to work with an advisor, the real issues are disclosure and what the sponsor gets for the add-on cost.

Retirement plan groups under the b-d umbrella must attract generalists to the pipeline of production, but less than 5% of the industry can add real value. Unless supported by accomplished teams, generalists and vendors that support them will be squeezed in the years ahead.

On the other hand, the elite can still grow their business by formulating, documenting, communicating and delivering a value proposition that includes a prudent process, transparent pricing and a co-fiduciary partnership.

This may be easier said than done because articulating one’s value can be quite challenging, particularly when dealing with less than informed sponsors and sponsors that don’t follow recommendations, a fact of life in the retirement plans industry.

Regardless of how competent they are, advisors could be further challenged by a biased media, a leaky rollover bucket, new pension legislation, tax law changes and other advisors trying to steal their business.

The retirement plans industry is an increasingly challenging place in which to conduct business, but the elite can still grow their business through consolidation. In addition to defining the value of independent advisory services, consolidation will require advisors to become more efficient, find scaleable solutions and develop new business models.

If basic asset allocation already accounts for the majority of investment return, advisors would further benefit from sharpening their focus on other areas, like plan design and getting participants in the plan, rather than investing most of their time trying to improve returns through fund selection.

Helping advisors define their value proposition, providing tools and services to increase efficiency, supporting new business models and assisting with exit strategies are all areas where Hancock could offer real value to advisors. Hancock already functions as a backroom for their TPAs and now is the time to do the same for their top advisors.

If we were in Hancock’s shoes, we would also eliminate the general account guaranteed option, drop all funds with short-term redemption fees, develop a new proposal, label the supporting marketing material, develop a rollover strategy, a cross-selling strategy, a bonus program for advisors and commit resources to developing a market for the annuitization of participant assets.

Restricted and confidential. Not to be duplicated or distributed.

© Copyright 1999-2005 Center for Due Diligence. All rights reserved. This information has been taken from sources believed reliable, but accuracy and completeness cannot be guaranteed. The information is for broker-dealer use only and should not be construed as an offer to buy or sell securities or any other investment.

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“Change may offer opportunity, but only for those that can adapt.”