NEW YORK -- Towers Perrin is dumping some of its defined contribution clients, rather than repair individually customized software infected with the year 2000 problem.
Towers Perrin spokesman Joe Conway said the firm decided "a small number" of client cutting became necessary because of the prohibitive cost of repairing the software.
The year 2000 -- or Y2K -- problem involves older software that uses only two digits for date fields. The software can't tell the difference between the dates 1901 and 2001.
The software's inability to recognize the difference in the dates is a serious problem in calculating benefits, according to consultants.
But Towers Perrin is telling only some of its clients to find new administration providers. It is dropping only those clients for which Towers Perrin executives have determined the cost of repairing the software outweighs the value of the client relationship to Towers Perrin, Mr. Conway said.
According to industry sources, some other defined contribution plan service providers might be doing the same thing.
Mr. Conway said he didn't know the minimum asset size in determining whether to stay with or drop a client.
Mr. Conway also said he didn't know the exact number of clients already dropped by Towers Perrin, and couldn't say whether any additional clients would be asked to find new providers.
One client dropped was the Navajo Nation, Window Rock, Ariz.
It has about $130 million in employee benefit assets and has been a Towers Perrin client for 22 years, said Rodger Martinez, retirement plan administrator.
Mr. Martinez declined to say how many participants are in the defined contribution plan or how much is in each of the Navajo Nation's defined benefit and defined contribution plans.
The Navajo Nation got a letter from Towers Perrin saying it needed to find a replacement for benefit administration services. The letter was sent in August, but its existence only recently became known publicly.
The letter states other software providers also have decided not to fix some software applications infected with the Y2K bug.
"After careful consideration of the significant costs and the resources required to upgrade existing applications to take 21st century dates into account, we've come -- very reluctantly -- to the same conclusion with respect to some of our own software. I regret to inform you that after Dec. 31, 1998, we will no longer be able to support the administration of your defined contribution plan and we cannot renew any support program running beyond that date," Towers Perrin's letter said.
Mr. Martinez said his plan has selected Watson Wyatt & Co., Phoenix, to replace Towers Perrin. He said he had no problems with Towers Perrin, but he is "not disappointed" to see them go.
One plan not affected by Towers Perrin client cuts is American Airlines Inc. Towers Perrin does record keeping on a $3 billion, 70,000 participant 401(k) plan for American. William Quinn, president of AMR Investment Services, Dallas, which oversees American's pension fund, said he had heard large clients would be unaffected.
However, a source told Pensions & Investments that at least one medium-size Towers Perrin client was told to look elsewhere for record-keeping services. Executives for that company were not available for comment; Towers Perrin officials also would not comment.
Despite the dumpings, Towers Perrin remains committed to providing administrative, record-keeping and other services to defined contribution plans, Mr. Conway said. He said Towers Perrin is opening several new offices.
He said Towers Perrin executives have decided to focus on "strategic, larger organizations." Whether Towers Perrin will continue with a client, he said, depends on the amount of work provided for a client and the size of the client.
"There are a number of criteria that come in play. They fall into the general categories of size and the scope of the work you do. There is a threshold you cross," Mr. Conway said.
He said he couldn't identify the cost of repairing customized software, but that it is a "significant investment" for Towers Perrin.
Towers Perrin officials declined to answer a number of other questions about clients being dropped. However, in part of a statement faxed to P&I, Towers Perrin officials stated it "sees a linkage between benefit administrations and its other consulting services."
The statement said its target markets "include those key clients for whom we have longstanding and extensive consulting relationships in areas other than benefit administration."
The fax also stated: ". . . the firm has declined to respond to proposals or bid on administration services for organizations whose needs did not meet our profile. In addition, there are some existing benefit administration clients of the firm who do not fit this profile, and for whom our service offerings are inconsistent with their needs. For these clients, it is not in their best interest or ours to make the necessary effort for the year 2000 changes."
Defined contribution service provider Northern Trust Retirement Consulting Inc., Chicago, is in the fortunate position of having new software that isn't plagued with Y2K problems, said Connie Magnuson, chief executive officer. "We have been taking the whole Y2K problem very seriously," she said.
She said she couldn't speculate on why some service providers still are grappling with the problem. "I think the year 2000 issue as it relates to software in this area is going to propel people to have to make strategic decisions. So I think that people who may have been on the fence -- as to a strategic direction -- it may be that Y2K piece that makes them finally decide that they just can't do it," Ms. Magnuson said.
Software consultants said the Y2K problem has such horrendous repair costs that some firms could drop whole lines of businesses.
For the typical user, one software package is like another. But that isn't the case for benefit administration software.
Software is customized "particularly on the benefit administration side, the software has to be customized for that specific plan design for that client," Ms. Magnuson said.
And it can be expensive to fix. "The software involved in calculating benefits can be very complex. It really could be that the cost of rewriting it to be compliant might not strategically fit within that client relationship," she said.
But Gregory Metzger, director of defined contribution plans for Watson Wyatt in Sherman Oaks, Calif., said the fastest growing area in defined contribution plan administration is with clients with less than 1,000 participants. He said plan administrators are fighting for that business and wouldn't be doing it if it weren't profitable.
Individual administration software is customized, he said, but customization generally involves parameters in the software and small programs called subroutines. The core software is generally the same for all clients and YK2 problems in such software needs to be fixed for all clients, he said.
Watson Wyatt hasn't cut and doesn't intend to cut clients based on YK2 problems, he said, adding Watson's software already is mostly compliant.
Some providers might cut clients, Mr. Metzger said, but he suspects it would be based on overall business decisions that could be related to YK2 problems, not solely because of software problems.
Even without identifying year 2000 problems, some defined contribution providers recently have decided to make changes in benefits administration services.
In August, Automatic Data Processing Inc., Roseland, N.J., announced it had preliminarily agreed to a strategic alliance in benefits administration outsourcing with William M. Mercer Inc., Louisville, Ky. Mercer officials recently announced the firm will exit the defined contribution plan record-keeping business and concentrate on consulting rather than administrative services. Most of its record-keeping clients already had shifted to the joint venture.
This month, Watson Wyatt disclosed it is pulling out of Wellspring Resources LLC, a joint total benefit outsourcing venture it launched in 1996 with State Street Global Advisors.