Scandals, asset growth spark searches for DC services

Searches for defined contribution plan providers are up 35% from the levels of 2002 and 2001, the result of fiduciary worries in the aftermath of the mutual fund trading scandal as well as plan assets swelling in the bull market.

"We saw well over a 30% to 35% increase in 2003 in RFPs for record keepers and bundled providers, and we expect it to keep up in 2004," said Bob Francis, head of work site distribution at ING US Financial Services, Hartford, Conn.

Defined contribution plans that have issued requests for proposals or are beginning to do searches for record keepers or bundled providers include:

-- The State of Washington Department of Retirement Systems, Olympia, which is seeking a consultant to assist in a record keeper search for the state's $4.5 billion in deferred compensation and combined defined contribution/defined benefit plans;

-- Michael Baker Corp., Coraopolis, Pa., which issued an RFP for a bundled provider for its $110 million 401(k) plan. Wendy Grindell, qualified plan specialist, said incumbent Putnam Investments may rebid. She said the search is being done for "benchmarking" purposes, and was launched before Putnam's mutual fund trading problems became known.

-- Selectron Corp., Milpitas, Calif., will use an RFP to find a bundled provider for its $250 million 401(k) plan;

-- North Dakota Deferred Compensation Fund, Bismarck, has issued an RFP for a record keeper for its $83 million plan; and

-- Jo-Ann Stores Inc., Hudson, Ohio, has issued an RFP for a new bundled provider for its $52 million 401(k) plan because "we haven't taken the contract out to bid in five years," said Tom Williams, vice president of human resources. Also, he said, plan officials are disappointed in the performance of the mutual funds from its current bundled provider AMVESCAP PLC, Atlanta.

Service providers agree business is booming.

"We've had close to a 40% increase in RFPs for our services" during the past six months, said Chris Guarino, president of BISYS Retirement Services, Philadelphia, which provides record-keeping and administrative services for financial services firms that advise 401(k) plans.

He thinks 45% of the increase in activity is due to the mutual fund scandal, with 35% of activity due to the improved economy and 20% due to routine RFP activity.

Mr. Guarino said "the economy is doing better and people want to see what their options are now." In addition, he said, "people want to see if they're getting (from their current providers) all the new bells and whistles available now."

BISYS recently won the record-keeping business from Minneapolis-based U.S. Bank's retirement plan services business, which totals $8 billion in assets.

Michael Waddell, a consultant with Watson Wyatt Worldwide, Detroit, said "there's a backlog of search activity" for record keepers because searches were down during the recession and bear market. He thinks about half of the new activity is due to the improving economy and stock market and half to the mutual fund scandal.

"Funds may not make changes, but they are definitely searching," he added. "In the last three months we've seen many more searches."

"More assets give you buying power," Mr. Waddell said, noting a rising stock market boosted 401(k) plan assets last year. "With assets up 50% for some funds, the record keeper is getting a lot more revenue. They may be slow to cut fees." He pointed out the pension funds "may not get the price cuts for record keeping (from their current provider) that they could get from a new one."

Michael Butler, senior vice president of NFS Distributors Inc., part of Nationwide Financial, Columbus, Ohio, agrees that searches have increased along with the stock market.

"In 2003 and so far in 2004, RFP activity has been going straight up, back to 1999 levels," said ING's Mr. Francis. "Now that companies are in a sustained growth mode, they want to see if they're getting the best bang for their bucks and the best services from their providers."

He said that while "price is the No. 1 motivator," plan officials believe "price also equals value, and if a company is not getting the best price, it wants to get meaningfully enhanced technology."

In the public market, most searches have been launched by 457 plans. In fact, Robert Barkin, vice president of corporate communications and public relations for ICMA Retirement Association, Washington, said the firm had "a big spike" in RFPs for record keeping for 457 plans in the fourth quarter.