LOUISVILLE, Ky. -- Defined contribution plan sponsors in the next two years will be adding outside funds to their bundled providers' menu of investment options, a new survey by Eager Manager Advisory Services shows.
Two years ago, just 15% of plan sponsors using bundled service providers added funds not offered by the providers. That percentage rose to 19% this year and, by 2001, 28% of respondents expect to add such funds.
This change will occur at the expense of strictly bundled and investment-only management relationships, which will see modest reductions, said David L. Eager, principal.
Some 160 large plan sponsors with plans assets of $60 million and more responded to the survey that was completed in April.
Close to 43% of plan sponsors said they now have a bundled relationship with no outside funds, but that percentage is expected to drop to 39% in two years.
"Companies who currently have bundled services will continue to value the relationship with their provider as a bundled relationship, but will increasingly go outside the relationship where they have an independent relationship and where they feel they get what they call a 'best of breed' investment product," Mr. Eager said.
Meanwhile, the percentage of plan sponsors with unbundled plans is expected to drop to 33% from 38% now, the survey showed.
Advice not a priority
The survey also found plan sponsors view risk evaluation and monitoring as the most important service provided by their money managers, with 61% of companies rating it highly when they consider an ideal relationship with their investment managers. The least important is participant investment advice, with only 12% of plan sponsors considering that a high priority.
"Plan sponsors are not going to look to their investment managers to provide participant investment advice," said Kristin Pawlak, associate research director at Eager Manager Advisory. "According to interviews, they're looking more to consultants . . ."
The survey results highlight a shift in decision-making at corporate defined contribution plans, Ms. Pawlak said.
Two years ago, the human resources department was most involved in running the defined contribution plans at 72% of the companies surveyed, while the treasury department was most involved in 32% of the plans. This balance has shifted so finance/treasury staffs are involved at 76% of companies; and human resources, 19%.
Also, Mr. Eager said plan sponsors are starting to recognize a downside to the one-stop-shopping approach of bundled services.
"The drawbacks of bundling are that there are limited investment products and there is a feeling that the fees associated with investment products are high," Mr. Eager reported.
No limits
Still, plan sponsors are not moving in significant numbers away from bundled relationships or for that matter their current preference for mutual funds, Mr. Eager said. They just don't want to be limited by the options offered by the bundled provider, he said.
"From what we see the full service (bundled) exclusive relationship is not necessarily on a major decline, it is plateauing," Mr. Eager said.
And the managers are having to comply.
Competitive pressure is forcing many bundled service providers to relax the penalties they used to attach to plans that use outside funds, Ms. Pawlak said.
Representatives of bundled service providers acknowledge the trend toward outside funds is gaining popularity.
Merrill Lynch & Co., Inc., Plainsboro, N.J., offers 600 outside funds and 38 fund families, said Pat Walsh, senior vice president of group employee services. So a plan sponsor would be hard-pressed to find an outside fund that Merrill Lynch could not match, he said.
Still, the firm has tried to accommodate plan sponsors that wanted to look outside Merrill Lynch's menu of investment options, he said.
"We felt that open architecture was the way to go and we would not want to limit plan sponsor selection of funds," Mr. Walsh said.
Plan sponsors will bring funds with them from a previous provider or want to add a fund and "we will work through it."
He expects the trend to gain momentum.
"I think what will happen is we will go to a totally open architecture," he said.
Plan sponsors want to retain the bundled approach to minimize fees, said Sandy McCarthy, principal at State Street Global Advisors, Boston.
"But they're looking at it and scrutinizing it more," Ms. McCarthy said. "There are a lot of RFPs for bundled and they are asking for outside investments."
Fitting the guidelines
The treasury side of the corporation has become more involved, and staff is looking closer at the investment lineup, she said. The treasury side also is pressing for the development of investment policy statements and needs funds that fit those guidelines.
SSgA generally looks for the best funds in each asset categories and if they are not State Street funds, executives try to create alliances to help with revenue sharing, Ms. McCarthy explained.
"There are no hard and fast rules," she said.
Still SSgA, like most bundled service providers,uses the money management fees to cover the costs of services they also deliver to plan sponsors -- usually at no extra charge -- like record keeping, administration, communication and plan participant education, she said.Consequently, plan sponsors who include outside funds might incur added per-participant fees, Ms. McCarthy said.
While they see the trend toward a bundled plus outside funds trend coming, bundled service providers are faced with the financial reality that they need to manage some of the money, said Tom Kmak, senior vice president of J.P. Morgan/American Century, Kansas City, Mo.
"I would contend as we think about all the acquisitions in the industry in the last 15 months, every one of those transactions were people who were not managing the money selling to people who were managing the money," Mr. Kmak said.
Compuware's experiences
When executives at Compuware, Farmington Hills, Mich., decided to overhaul the $125 million defined contribution plan last year, getting funds that matched its new investment policy guidelines and ones that consistently performed in the top quartile in each asset class was a top priority, said Joe Schuster, Compuware's manager of qualified plans.
One service provider was dropped from competition because it would not allow Compuware to include outside funds, Mr. Schuster said.
"Plan sponsors are trying to find the best fund in each investment category by balancing the investment approach vs. investment styles," he said.
When Compuware finally hired Fidelity Investments to be its bundled provider, the ability to bring in outside funds with competitive fees was structured into the deal, Mr. Schuster said.
This was not easy to do, he said.
More choices for small plans
While the Eager study focused primarily on the larger corporate plan market, even companies that service smaller plans are starting to offer sponsors outside fund choices.
"There's more pressure on 401(k) mutual fund providers to provide multimanager 401(k) products without wrap fees," said Mary Ellen Higgins, vice president of retirement marketing at John Hancock Funds, Boston.
Last year, Hancock started offering such a strategy, dubbed Hancock Complete. The approach is now its best-selling service and is responsible for increasing by 300% the average asset size of plans the company attracts, Ms. Higgins said. Hancock's average plan size increased to $2.5 million from $500,000, she noted.
"Most mutual fund companies have been slower to get into multifund families but insurance companies were forced into it earlier because they did not have the reputation and had lower performance," she said.
With Hancock Complete, plans with at least $1 million in assets can choose two outside funds and plans with $2 million in assets or more can choose three outside funds, Ms. Higgins said.
Already Merrill Lynch is benefiting from this open architecture trend. Mr. Walsh said the firm has been contacted by plan sponsors that want to add its funds to their current menu of options provided by another bundled provider, he said.
