DC plan sponsors shop for service providers

Defined contribution plan executives increasingly are searching for new service providers in an effort to trim plan costs.

Plan sponsors citing fees as one reason they have issued or plan to issue RFPs this year for record keepers or other providers include:

• Philadelphia Public Employees Retirement System, which issued an RFP in February for a record keeper for its $367 million 457 plan;

• Texas Employees' Retirement System, Austin, which started a search in March for an investment advice provider and managed account service for participants in its $703 million 401(k) and $246 million 457 plans;

• Los Angeles City Deferred Compensation Plan, which issued an RFP in March for a record keeper for its $1.6 billion plan;

• Missouri Deferred Compensation Commission, Columbia, which plans to issue an RFP later this year for a third-party administrator and investment provider for its 457 and two 401(a) plans, with total assets of $860 million;

• Washington State Investment Board, Olympia, which will launch a search later this year for a record keeper for the state's $1.7 billion deferred compensation and the $3.5 billion DC portion of the state's combined defined benefit/defined contribution plan;

• Healthfirst Corp., Melbourne, Fla., which recently issued an RFP for a bundled provider for its $185 million defined contribution plans; and

• Gaston County Dyeing Machine Co., Stanley, N.C., which issued an RFP earlier this year for a bundled provider for its less than $100 million 401(k) plan.

Pamela Hess, a consultant with Hewitt Associates LLC, Lincolnshire, Ill., said the firm has seen a 30% to 40% increase in RFPs for defined contribution providers during the first half of 2004.

According to 401(k) Exchange.com Inc., Lake Worth, Fla., there has been a 60% increase this year in plans actively searching for a new 401(k) plan provider or seriously considering changing providers. One of the main reasons is increasing dissatisfaction with administrative fees, according to Fred Barstein, chief executive officer.

According to a recent study by Hewitt, seven of 10 plan sponsors are very or somewhat concerned about plan costs.

And interviews with fund executives back that up.

"Costs were very important to us," said Tony Johnson, chief investment officer of the Philadelphia fund. The most important factors in the fund's decision to keep Great-West Retirement Services, Denver, as its record keeper were costs and client service, according to Mr. Johnson. "They submitted a very competitive quote," said Mr. Johnson. "I think the costs were a bit lower than they had been before."

"Costs were certainly a factor" in the Texas fund's choice of CitiStreet, Quincy, Mass., over Financial Engines, Palo Alto, Calif., and Morningstar Inc., Chicago, said Mary Jane Wardlow, a spokeswoman for the system. "We wanted to get the best services but we wanted to keep costs under control."

At the Washington State Investment Board, "costs will be a factor" in deciding which record keeper to hire, said spokeswoman Dawn Gothro. The RFP hasn't been published yet, "so at this point we don't know what the exact weighting of the costs will be," she said.

Costs were also a driver for Gaston County Dyeing Machine, according to David Craig, chief financial officer and part owner. The firm hired Vanguard Group, Malvern, Pa., "which had the highest rating overall and also had the lowest fees," said Mr. Craig.

Said Bob Walters, director of human resources for Healthfirst: "Costs and full disclosure of costs are very important to us."

Before issuing its RFP, Healthfirst went to Clark Consulting Co., Atlanta, which does cost benchmarking studies for 401(k) plans. The firm has done 12 such studies so far in 2004 and two of the firms have since issued RFPs for new providers, according to Steve Gissiner, principal. He heads the group doing the benchmarking studies from his office in Ann Arbor, Mich.

"There's been an increased focus on plan sponsors looking at 401(k) plan expenses because of an awareness of their fiduciary obligations (to get the lowest costs for their plans) and also because of concerns associated with the market-timing and insider trading issues that have impacted certain mutual fund companies," said Mr. Gissiner.

The focus on plan sponsors' fiduciary liability and the fact that getting the lowest costs to benefit their plan participants is part of that responsibility has been an important factor in getting 401(k) plan sponsors to focus on costs.

"Plan fiduciaries can't sit around and wait if they have a study showing that their fees are too high; they've got to act," said Michael Weddell, a consultant in Watson Wyatt Worldwide's Detroit office. "A lot of firms are issuing proposals now because of the fee issue."

"The costs for anything and everything to operate a 401(k) plan are important now to plan sponsors," said Larry Heller, a director in the Secaucus, N.J., office of Mellon Human Resources and Investment Solutions.

"In a number of instances, clients have come to us and asked if we thought the plan should go out to bid, and today the most likely answer is yes," Mr. Heller added.

"The most accurate way to get a benchmark (of what costs should be) is to go out and bid," said Hewitt's Ms. Hess.