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April 06, 1998 01:00 AM

TINY DC PLANS GO BEGGING: BUNDLED PROVIDERS TURN AWAY BUSINESS FROM STARTUPS

Fred Williams
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    Large defined contribution bundled service providers are turning their backs on new business.

    Most major bundled providers say they will not accept business from a startup plan unless it is a very large employer with major anticipated cash flow such as Wal-Mart Stores Inc., Bentonville, Ark. Wal-Mart, which started its plan last year (Pensions & Investments, Feb. 3, 1997), selected Merrill Lynch Group Employee Services, Princeton, N.J., as service provider for its 640,000 employees.

    But most companies smaller than that could be facing a difficult time finding a major vendor willing to provide bundled services. Most of the top providers, such as mutual funds and insurance companies, are willing to bid only if there are sufficient assets already on hand to cover the cost of related services such as record keeping, administration and investment education.

    The result could be that smaller startups could end up paying higher fees than more established plans that bring in assets.

    Asset size key

    Gary Blank, president of Gary Blank & Associates, a San Francisco-based defined contribution consulting firm, said the dilemma is illustrated by a case involving Sundt Corp., Tucson, Ariz. Sundt recently hired American Express Retirement Services, Minneapolis, as bundled provider for its new 401(k) plan. Sundt has 1,500 employees and a $50 million payroll; and did not plan to provide a company match.

    But the hire came only after weeks of unsuccessful solicitations and sending of RFPs, said Mr. Blank.

    Why didn't the 401(k) vendor community respond to the midsized employer's need?

    "Assets," said Mr. Blank. "Most providers are in the business of managing assets and only incidentally in the record keeping business. You have to search much harder for someone to help with a startup plan."

    And, record-keeping expenses will be higher for a startup plan than a plan with $10 million or so in assets.

    "Looking back," said Mr. Blank, "I'd warn clients to be more diligent in these circumstances. The message is: when you have a situation like this, be aware you have to do a lot more due diligence. If you have $50 million in assets, everyone wants your business."

    A spokesman for Sundt said company officials had no comment.

    Bill Schneider, managing director at Dimeo Schneider & Associates, Chicago, said major mutual fund companies are not likely to accept startup 401(k) business without assets in place. "They want $10 million or $20 million in assets. If you have 10,000 lives and a defined benefit plan with $100 million or more, sometimes they will look at it. They might feel they can get a shot at the pension plan assets," he said.

    Unbundled route

    Asked what employers considering a 401(k) startup should do, Mr. Schneider said the more practical -- although more expensive -- approach would be to go the unbundled route: retain a third-party independent record keeper and select mutual fund investment options.

    A smaller startup plan (with about 150 employees) could end up paying as much as three times as much as a large startup plan (with about 10,000 employees). The large plan could expect to pay about $50 per participant; a smaller plan, $150 per participant, benefits consultants estimate.

    "The choices are limited on a startup," said Mr. Schneider, "We tend not to deal with startups."

    Shellie Unger, head of institutional sales and marketing at the Vanguard Group, Valley Forge, Pa., said Vanguard "is an investment management firm and we are selling investment management . . . we generally don't bid on startups."

    She said Vanguard has "plenty of business" from 401(k) plans that have assets. "The economics of startups don't make sense" for Vanguard, she said.

    John McGlone, principal at Buck Consultants, Secaucus, N.J., said the choices of nearly all employers, of any size, seeking to start a 401(k) plan are limited and probably costly.

    "We are certainly seeing that (lack of competitive bids from bundled providers) in the marketplace, and not just for new plans. We have seen plans which result from restructurings and spinoffs with historical participation rates, some with assets, face a lot of reluctance by bundled providers," he said.

    "The benchmark is not the number of lives but assets," said Mr. McGlone. "If you walked in to some large providers with $100 million in the plan, but most of it in company stock or GICs, you are not going to get anyone to bid on it."

    He said the alternative for plans that cannot attract bids from fully bundled providers is to "recognize vendors are reluctant and that you are going to have to pay more for record keeping, or you could adopt a plain-vanilla administrative program using simplified provisions which contain restrictions on loans, fund transfers, investment choices and plan features."

    Mr. McGlone said the reluctance by major bundled providers to accept startup plans "is an industry phenomenon we have seen in the last year or so, probably due to capacity issues."

    Katie Libbie, vice president-marketing at American Express, said her company does respond to requests from employers starting new plans with at least 500 employees or plan conversions with at least $10 million in assets.

    Even some record keepers are starting to look less favorably on the small and midsized plan business. The Kwasha Lipton Group of Coopers & Lybrand, Fort Lee, N.J., has shed nearly 300 small plans from its record keeping books in the last year.

    Margaret Ann Cole, principal and coordinator of Kwasha Lipton's mutual fund alliances, said the firm is focusing its attention on the plan market with at least 10,000 participants.

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