Corporate Pension Plans Favor Bundled Services

U.S. corporate pension plans are discovering the value of bundling the investment management and administration services of their defined benefit programs, according to a recent study by industry research firm Greenwich & Associates.

The study of 913 corporate funds with assets between $25 million and $250 million revealed that bundling investment management and administration services of DB plans has become a clear trend among companies looking to improve the cost efficiency of their pension programs.

DB, DC Unite

Additionally, the study found that many companies are placing their DB plans with the bundled investment management and administration services of their defined contribution plans, essentially creating a single point of accountability for both plan types.

Greenwich Senior Marketing Analyst Ryan Randolph, who oversaw the study, said the trend towards bundling, while gradual at first, should have staying power.

"The idea is taking off in the pension industry - maybe not fast, though, because people have to weigh a lot of considerations, and moving from a provider can be difficult, especially when you are changing the way the plan is administered," he said.

Bundled services are far from a new idea among corporate funds. According to the study, an overwhelming majority of DC plans already use bundled services as firms "realized the potential of DC plans and rapidly developed the capacity to provide not only investment functions for 401(k)s but also individual account administration."

Flush With Cash

Meanwhile, older DB plans were given less attention as a healthy stock market and generous interest rates kept most DB plans flush with cash with little need to streamline costs through bundling services.

"Companies didn't have to pay attention to their DB plans because the market was through the roof. Everybody's pension was wildly over-funded," said Barry Schub, senior director of New York Life Investment Management, a company that provides bundled services.

However, three years of poor stock market performance and lowered interest rates have impacted DB plans for the worse, Schub said. The study indicates that 18% of all plans surveyed are now bundling their DB services. Another 11% have considered bundling their DB plans, with an additional 7% set to hire a bundled DB provider within the next 12 months. Beyond that, 4% of funds surveyed may consolidate their DB and DC plans to a single service provider, the report said.

The primary motivation for bundling DB plans is cost savings. But companies taking part in the study reported other incentives as well, including improved vendor management and reporting, as well as the advantage of added advisory tools for fund participants and employees.

Additionally, Schub suggested that centrally locating all services, such as actuarial, administration, management and trusteeship, could yield better performance considering the complex nature of investing.

However, centralizing services proved to be a sticking point for many of the companies included in the Greenwich study. Some pension plans felt there was no single service provider capable of delivering all of their needs adequately. Others saw a risk in placing all their trust, and assets, with a single service provider.

Still others believed that any potential cost savings offered by bundling would not justify the cost and hassle of making a change.

Schub agreed with the study's finding that some companies are reluctant to change to bundled services if for no other reason than to maintain relationships with existing money managers and consultants.

But Schub also said that the move towards bundling has accelerated to the point of becoming an industry trend. "In 2002 NYLIM had twice as many bids for bundling DBs and DCs together as the year before," he said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.