Employers’ one-stop shopping for pension plans gains speed

A trend among employers to consolidate their retirement plan services with a single source is developing faster than expected, according to a new survey.

Almost 70% of the companies responding to questions from the McHenry Consulting Group in Berkeley, Calif., say they would prefer to buy from a single vendor all their retirement-plan services — including record keeping, trust and actuarial services, investment management, employee communications and benefits counseling.

The pace of this shift is “a little surprising,” says Phil Croy, retirement partner in the San Francisco office of PriceWaterhouseCoopers LLP, one of the survey’s six corporate sponsors. If financial advisers are not careful, they could risk losing clients for whom they set up business retirement plans.

In fact, 40% of responding companies had already begun the process by hiring a single supplier to provide services across all the retirement plans they offer, from defined benefit to 401(k) plans. Fully 85% of the companies that have moved to integrated services have saved money through improved efficiencies.

Mr. Croy notes, however, that these numbers, while useful, reflect only part of the market. Indeed, the survey, conducted last summer but only recently released, targeted 1,200 employers with assets ranging from $5 million to $100 million, in Alaska, Arizona, California, Colorado, Hawaii, Idaho, New Mexico, Nevada, Oregon, Utah and Washington. Almost 30% responded either over the Internet or by telephone.

end of an era?

One question now, says McHenry managing director Ward Harris, a co-author of the study, is “how can both asset managers and asset advisers be more successful in addressing the needs of this marketplace.” With “forward-thinking” employers on the hunt for the best service at the best price, says Mr. Harris, the traditional practice of hiring as many as seven vendors for each plan may be coming to an end.

In fact, McHenry consultant Olga M. Pande, co-author of the study, was surprised that more companies haven’t integrated their outsourcing.

“There are already a lot of vendors out there who could provide all the services for all your plans in one place,” she says. “I’m surprised there are still a lot of people who think of the plans as so different that they will still not try to bundle all the services. If you’re going to bundle, why not bundle everything — qualified, non-qualified, defined benefit, defined contribution — all in one plan?”

So far, the three services employers most likely want from a single source are trusteeship, record keeping and mutual fund investment management. And over half the managers reported that they already used a single vendor for two or more plans. About 57% of companies that have begun buying integrated services have been doing so for three years or more. Meanwhile, almost a quarter of the respondents say they would even consider using a single source for health as well as retirement benefits.

Cash-balance plans, which include features of both 401(k)s and conventional defined-benefit plans, are proving to be a popular way to integrate plans, particularly when companies merge or make acquisitions, the study’s authors say. About 14% of respondents already use a cash-balance plan, and 10% of the rest had definite plans to add one to their retirement program.

Savings have been found in both hard costs like management fees and soft costs of the time spent by a company’s staff. Eighty-five percent of companies gained efficiency through integrated services, which doesn’t surprise Ms. Pande, who formerly worked in human resources.

For instance, contacting each vendor, obtaining and filing their reports, and distributing the information to employees might have to be done only once a year under an integrated system instead of two or three times. “I think there is a big opportunity for vendors who can offer integrated services,” she says.

PriceWaterhouseCoopers’ Mr. Croy works with both mid-market and big-company clients. He thinks that the largest firms aren’t as likely to search for integrated services yet.

“The larger clients we work with are still interested in the best services now. But the mid-market will be the next tier where there will be potentially some real opportunities for outsourcing and consolidation.”

Mr. Ward agrees: “Once upon a time in the dark, misty past, retirement plans consisted of whatever you could save under the bed. We’ve come a long way from there.”