Total Retirement Outsourcing: A Bundled Approach
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Total Retirement Outsourcing: A Bundled Approach

By Stephen Miller  5/1/2006
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Plan sponsors are still waiting to be convinced of the merits and advantages of bundling their defined benefit and other retirement programs to a single outsourcing provider, according to a new survey report, Next Wave: Opportunities and Challenges in the Total Retirement Outsourcing Market, by Waltham, Massachusetts-based Chatham Partners, a provider of market research for the financial services industry.

Sponsors’ reluctance is largely founded on the belief that bundling does not deliver true cost savings and bundled arrangements do not offer the same degree of investment flexibility that their current unbundled arrangements provide, the report reveals. As a result, only 13 percent of plan sponsors intend to bundle their defined benefit plans in the coming 12-24 months.

However, if plan sponsors are convinced of the benefits, over 50 percent would bundle to a single vendor their defined benefit plans' administration and related services. Additionally, 67 percent would integrate the management of their defined contribution and defined benefit programs with a single vendor.

The survey report is based on a nationally representative sample of 466 sponsors affiliated with corporate plans ranging in assets from $1 million to over $1 billion, and 14 leading service providers, plus over 20 in-depth interviews with major industry providers.

“The marketplace for bundled defined benefit and total retirement outsourcing [TRO] is experiencing growing pains," says Peter Starr, president and CEO of Chatham Partners. TRO covers the bundling/outsourcing of all administrative and related services for a client's defined benefit and defined contribution plans to a single provider.

"Service providers have built a vast array of products with advanced features and functionality that, in many respects, has outpaced the sponsor’s ability to recognize inherent value," Starr continues. "For the past 5-7 years, vendors have been trumpeting the advent of a revolution in how companies can not only manage their defined benefit plans, but also integrate the management of those plans with other retirement and/or benefit programs."

Despite the growth of this market, Starr says, "it is safe to say that a revolution has not occurred. Instead, the process has unfolded as an evolution.”

What's in a Bundle?

According to a report by AON Consulting, DB/DC Bundling Can Simplify Administration Burdens and More, a typical defined benefit/defined contribution bundling arrangement will include any or all of the following services:

• Recordkeeping and plan administration (including integrated voice response, customer service representatives, and web access).

• Compliance (testing, government forms, etc.).

• Actuarial valuation and retirement consulting services.

• Investment management, trustee, and custodial services.

• Total retirement/retirement planning statements for participants.

• Participant education and retirement/financial planning services

The principal challenge that all providers face, according to Starr, is convincing the large body of unbundled plan sponsors of the benefits of bundling. The challenge is generally manifest in two core beliefs held by sponsors who remain unbundled. That:

• Bundling compromises investment flexibility.

• Bundling cannot provide cost savings.

Addressing these perceptions is a strategic imperative to any provider that hopes to move from selling to early adopters of bundled defined benefit services, to selling to the broader audience that would be willing to bundle services if convinced of the benefits.

Other key findings of the Chatham Partners survey include:

• 37 percent of the plan sponsors report being uncomfortable with the time, resources and costs associated with running their plans. However, only 12 percent are actively interested in reducing costs.

• The remaining 25 percent state that, while uncomfortable, cost reduction is not a priority.

In for a Penny, in for a Pound

Plan sponsors who have already made the decision to bundle some of their services are more predisposed to bundling additional services. Almost one-third of sponsors who take a "semi-bundled" route state their intention to bundle additional services within the next 12 to 24 months.

Plan sponsors have a common series of advantages they hope to realize through full bundling of their defined benefit plans. These include:

• Greater vendor accountability.

• Enjoying greater efficiency and time savings.

• Having a single point of contact.

• Improving the quality of plan sponsor services.

Almost one-third of plan sponsors stated that they would be willing to bundle services to achieve incrementally lower costs, the survey shows. However, less than 15 percent of sponsors stated that they would be willing to alter their relationships with investment managers/consultants or sacrifice investment flexibility in order to achieve this.

But moving plan investments into a bundled solution appears to be a “sticky wicket” that inhibits the growth of cost savings. And vendors that have sought to define opportunity in the retirement industry by identifying client dissatisfaction with existing vendors may be disappointed. Survey results show satisfaction levels are generally high for both primary defined contribution and defined benefit vendors. The top two satisfaction ratings average 77 percent for the primary defined benefit vendor and 83 percent for the primary defined contribution vendor.

Related Articles: 

Defined Benefit Pension Plan Administration: Will Outsourcing Work for You?, Milliman, January 2012

Bundled or Best in Class? Key Considerations for Selecting Service Providers, Benefits Quarterly, Second Quarter 2011 

Stephen Miller is the manager/editor of SHRM's Benefits Discipline.

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