COME TOGETHER

More and more companies are consolidating administration of their pension plans and 401(k)s. The cost savings can be substantial.

More and more companies are consolidating administration of their pension plans and 401(k)s. The cost savings can be substantial.

By Jinny St. Goar
February 2003
Institutional Investor Magazine

Three years ago most pension executives were still basking in the glow of the historic bull market, as strong fund returns flowed into corporate operating income. But pension administration manager Julie Douglas was already planning to institute programs that would help her employer, Service Corp. International, save money. The Houston-based funeral home owner had recently decided to set up a new 401(k) to supplement the company’s cash balance plan (which had replaced its defined benefit plan back in 1993). Douglas decided to move the administration of the company’s cash balance plan to Massachusetts Mutual Life Insurance, the same vendor that would be handling the 401(k).

The cost savings were impressive. Douglas lopped $700,000 off Service Corp.'s annual bill of $800,000 for joint administrative costs by choosing MassMutual’s integrated retirement plan services. Those savings reflect efficiencies, as well as the effective subsidy from investment management fees on the defined contribution plan. Today the two plans have approximately $125 million in assets -- about $70 million in the cash balance plan and an additional $55 million in the defined contribution plan -- compared with $128 million at the time of the switch.

More and more plan sponsors are following Douglas’s lead. The average corporate pension plan is only 77 percent funded, down from 100 percent at the start of 2002, reports Stamford, Connecticutbased benefits consulting firm Towers Perrin. Thus, pension executives are doing everything they can to make their plans more efficient.

“Two years ago I’d say we would have had maybe four active prospects for combined defined contributiondefined benefit administration, while today we have 150,” reports Joseph Masterson, senior vice president of sales for Diversified Investment Advisors, an advisory firm for retirement plans that is owned by Dutch insurer Aegon. Similarly, Fidelity Investments vice president Brian Cooke finds that two thirds of all plan sponsors looking for plan administrators are asking for some combination of services.

“Cost savings are the underlying driver for these integrated services,” says Joshua Dietch, an analyst with Boston-based consulting firm Cerulli Associates.

Richard Burgess, who heads the human resources department at Tower Automotive, agrees. “It’s at the top of the list of reasons to do this,” he says. His company, a car parts supplier that recently moved its defined benefit plan to the same administrator that had been handling its defined contribution plan, is saving about $800,000 a year, an almost 50 percent reduction in its administrative and legal costs.

Thomas Clough, head of New York Life Investment Management, boasts that his company’s integrated service produces administrative cost savings for plan sponsors in the range of 30 to 40 percent. (Service Corp. realized far greater savings because it got an especially good deal and virtually eliminated its recordkeeping fees when it switched plan providers.)

Savings come from consolidating basic administrative and bookkeeping tasks -- receiving funds, moving them to the appropriate investment vehicles and disbursing them. Administering defined benefit plans does require one element that 401(k)s can avoid: a staff of actuaries to project future plan benefits and liabilities.

In addition to Diversified ($1 billion in integrated assets) and MassMutual ($3.5 billion), firms that handle the administration of both defined contribution and defined benefit plans include Cigna Investments ($40 billion), the Principal Financial Group ($6.5 billion), New York Life ($2 billion) and Fidelity, whose assets are undisclosed. With large actuarial staffs in place, insurers are naturals for this market.

Although many mutual fund companies act as defined contribution plan providers, offering investment management and plan administration, they have generally been reluctant to hire the actuaries and invest in the information technology systems to serve the defined benefit market. “We are looking at it, but for the time being we are holding off,” says an Amvescap executive.

Instead of developing defined benefit expertise in-house, in recent years two fund companies formed joint ventures with defined benefit consulting firms to offer integrated administration. T. Rowe Price Group linked up with Houston-based Synhrgy HR Technologies back in 1999, and J.P. Morgan/American Century Retirement Plan Services hooked up with Towers Perrin in October 2001. The T. Rowe Price joint venture claims assets of $5 billion, while the American CenturyTowers Perrin group reports about $10 billion in assets.

Plan administrators hope that over the long haul integrated services may give them a crack at attracting more assets when employees retire and convert their 401(k)s into rollover IRAs. No industry battle is more critical than the fight for these assets (Institutional Investor, March 2001).

“If you’re doing [the integrated] job right, when it comes time for a participant to retire, he or she will be better informed, wealthier and will find the process easier,” says Jeff Garrity, chairman of J.P. Morgan/American Century, which administers about $41 billion in defined contribution assets. With the integrated services, “we can help the plan participants manage their money on an individual level, rather than just on the group level.” In other words, this increases the chances of capturing rollover assets.

“It’s too early to have tracked that increased rollover capture,” Garrity cautions, although he does agree that it is clearly a significant impetus to this new market niche.

Plan sponsors point out that the integrated administrative services don’t just cut costs. They also offer employees greater access to their retirement accounts. With the advent of online access to defined contribution accounts in the late 1990s, some employees began to ask for more information about their traditional pension plans. At the same time -- and particularly over the course of the current bear market -- employers had started to feel that many of their workers didn’t appreciate the value of their defined benefit plan as much as they might, in part because they couldn’t check on the plan using the Internet. Once a company consolidates its plan administration, employees can easily gain online access to information about both plans.

“Being able to see a benefit makes it much more tangible,” says Service Corp.'s Douglas. Those among her company’s 16,000 employees who are participating in the defined contribution plan can now view their retirement account balances, including their projected Social Security benefits, on one Web page. “We don’t get a huge amount of feedback on our benefits, but folks who are using our online services report that they are delighted by the integrated offering,” Douglas says.

With the average 401(k) account balance expected to show a third consecutive annual decline when the 2002 numbers are tallied, any positive response from plan participants is welcome news indeed.

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