FARMINGTON HILLS, Mich. -- Compuware Corp.'s selection of Fidelity as quasi-bundled provider culminated an unusual search that could make the high-tech firm a poster child for institutionalizing defined contribution plans.
Compuware's new investment policy statement -- including stringent qualitative and quantitative tests -- was a key component of the company's four-month search for the lowest possible fees and highest possible performance for each investment option in the newly revamped plan.
In essence, the fast-growing computer firm made the three finalists -- Fidelity Institutional Retirement Services, Marlborough, Mass.; Putnam Investments, Boston; and incumbent record keeper Comerica Bank, Detroit -- compete to win Compuware's $126 million 401(k) plan and $275 million employee stock ownership plan.
"Our driving goal was to put more money in the pocket of our plan participants," said Joe Schuster, Compuware's manager of qualified benefit plans.
Consultants say this kind of review process is more typical of defined benefit plans. That a midsized 401(k) plan is taking the approach is indicative of the so-called institutionalization of the defined contribution business.
In the revamp, investment options were increased to 18, including company stock; the old program had six options, and no company stock.
So far, Fidelity funds will be used for eight of the options; others will be provided by Invesco Retirement Plan Services, Atlanta; UAM Retirement Plan Services Inc., New York; Janus Distributors Inc., Denver; and State Street Global Advisors, Boston.
The transfer of defined benefit practices to 401(k) plans has been slow, consultants say. But it is happening.
Among the methods just beginning to be used are investment-committee-level monitoring, investment policy guidelines and benchmarks, said Ruth Hughes-Guden, principal at Morgan Stanley Asset Management Inc., New York.
Timothy Brown, owner of Retirement Plan Resources, Los Angeles, estimated only about 10% of midsized and small 401(k) plans operate with investment policy statements. And most plan executives don't ask about such things as standard deviation, risk or fees.
Compuware's attention to such details is expected to save the company $258,000 in 1999, just less than $300,000 in 2000 and $358,000 in 2001. Compuware executives expect to use some of the savings to add independent investment advice for participants next year, Mr. Schuster said.
Plan participants will end up paying more -- collectively about $190,000 more in 1999 -- than they would have paid in fees under the current plan with Comerica.
"The fees the employees were paying were pretty good, but unfortunately that does not put money in employees' pockets at retirement," Mr. Schuster said. He acknowledged investment management fees now will be higher, but "we kept them well within industry benchmarks, and we made up for it with performance on a three- to five-year basis."
Compuware's aim during the negotiating process was to get investment management fees and performance to their optimum levels, he explained.
"Once these factors were neutralized, after that, we could make our decision based on service, capabilities and best fit for our organization," Mr. Schuster said.
MOTIVATED BY GROWTH
What motivated the vendors was Compuware's exploding growth. This year, the firm has been adding about 400 employees a month, he said. According to company estimates, Compuware's 401(k) plan is expected to nearly double by 2001. By 2003, Compuware executives anticipate the plan will have about $329 million.
Compuware's negotiation process included telling each finalist the best bids in various categories, without identifying that bidder, to enable the provider to meet or beat the top bid, he said.
During these dogged negotiations, fees for each of the top three contenders plummeted. One originally failed to give Compuware its institutional deal, Mr. Schuster said, but then dropped the cost as a percent of the total 401(k) assets about 22 basis points -- just to remain a candidate.
Once fees were driven down through competition, Compuware executives compared the performance of each fund proposed by the finalists. Each had to pass through Compuware's performance screens to make sure its three-year to five-year returns were in the top two deciles, Mr. Schuster said.
"We placed our focus on performance," he said. "All we looked to on the expense ratio is what you think is reasonable."
In the end, the winner -- Fidelity -- did not have the lowest fees, but its performance more than compensated for that, he said.
HELP FROM CONSULTANT
Mr. Schuster did not do all this on his own. Compuware selected a new consulting firm, Berthel Schutter LLC, St. Paul, Minn., to assist in the revamp.
Diane Berthel, comanaging principal, said she and Diana Schutter, both formerly of Arthur Andersen & Co., Chicago, started the firm in July.
Mr. Schuster was looking for a consultant that "could work off the same page I was on and someone who had the employees' interest first and foremost regarding performance and investment fees."
He knew, for example, he wanted a detailed process that closely monitored style drift and took a careful risk-return approach.
Berthel Schutter was recommended because the firm had developed a screening process similar to what he wanted, he said.
Ms. Schutter noted Compuware's investment policy statement is much more specific than those defined contribution plans that have such policies.
Compuware's policy statement includes a framework for ensuring investment options are consistent with the stated long-range performance standards for the mutual funds in the plan; investment objectives and risk vs. return profiles for each mutual fund and manager; investment and manager selection criteria; and provisions for evaluation and compliance reviews.
Some observers think Compuware is taking a risk by having such a detailed investment policy statement. A detailed policy leaves more opportunity for a misstep, which could be held against the plan sponsor in a lawsuit, said William A. Schmidt, attorney with the Washington law firm of Paul, Hastings, Janofsky & Walker.
Still, Berthel Schutter principals support the approach, saying such analysis has produced some surprising results.
For example, when Berthel Schutter applied its criteria to a popular large-capitalization growth fund offered from one of the top 10 mutual fund companies, the firm found that during a 36-month period, the fund had a new portfolio manager who moved to more of a smaller-cap emphasis. In addition, the fund had introduced some international holdings to what was supposed to be a domestic stock fund.
To help get funds with the best possible track record, Compuware made it clear in its investment policy statement that the computer firm could add outside funds to its menu of options should the main provider fail to have a fund that passed performance muster.
Should Compuware do so, the statement said, the provider could not penalize the firm with added fees. The fees would be the same as if Compuware were using one of the vendor's funds, Mr. Schuster said.
Its investment policy statement allows Compuware to include two to three funds in each option to give the main provider's funds some competition, Mr. Schuster said. So far, Compuware is using Fidelity funds to "map" or duplicate its current lineup.
Compuware executives, he said, also are considering adding some outside funds in at least three categories in which Fidelity already is providing a fund: The MAS MidCap Growth Portfolio is expected to be added with Fidelity's option in the midcap growth equity slot, for example.
He also is considering adding outside funds in large-cap value and short-term fixed income, but the new funds have not been identified.
"We want to keep them (Fidelity) on their toes," he said.