403(b) record keepers see heated battles continuing

The fight for market share among 403(b) plan record keepers is heating up, as more sponsors try to save money by consolidating administration of their plans as well as by reducing and simplifying investment choices.

“We expect consolidation to continue and accelerate,” said Edward Moslander, senior managing director of institutional sales and services for TIAA-CREF, New York.

“This is the tip of the iceberg,” said Joseph Masterson, senior vice president and chief sales and marketing officer at Diversified, Harrison, N.Y., predicting consolidation will proceed at a healthy pace for 10 to 15 years.

Although many recent large 403(b) consolidations have occurred at universities and colleges, sponsors in other 403(b) categories — health-care institutions, school districts, non-profit organizations and foundations — also are reducing the number of providers.

“Sponsors are taking an overall look at the quality of their programs — from both a plan administration and participant outcomes perspective — and they realize multiple providers doing the same thing wasn't helping them meet their goals,” Mr. Moslander said.

Consolidation has been spurred by changes in Internal Revenue Service regulations, most of which took effect in 2009, that require sponsors to exercise greater fiduciary responsibilities, including preparation of more comprehensive plan documents and greater attention to loans and hardship withdrawals.

When multiple providers serve a plan, “everyone has a different approach to a loan and everyone has a different approach to a withdrawal,” Mr. Masterson said.

Consultants and providers also say practical matters are driving this trend, including reducing the sprawl and overlap of investment options that, in some plans, can run into the hundreds or even exceed 1,000.

“The old scattershot approach of money (being invested) everywhere is confusing,” said Marina Edwards, a Madison, Wis.-based senior consultant for Towers Watson & Co.

“A key driver is cost constraints, whether it's K-12 budgets or hospital budgets, and providers are picking up on this,” Ms. Edwards added. “The consolidation trend will continue because when 403(b) plans pool their dollars, they purchase institutional funds and have more purchasing power.”

And when a sponsor consolidates administration of its 403(b) plan, it also consolidates administration of its other plans such as a 457(b) or 401(a) plan, Mr. Moslander said.

“We have experienced this trend across the 403(b) market in general,” Ms. Edwards added. “Sponsors are seeking ways to streamline the plan administration and investment options offered to participants.”

The higher education market remains the largest arena for 403(b) plans, and that is where some of the most prominent consolidations took place this year. Examples include:

• Michigan State University, East Lansing, reduced the number of providers to two from six for its two 403(b) plans. It also cut to two from four the numbers of providers for a 457(b) plan. The three plans have aggregate assets of $3.3 billion. It selected Fidelity Investments and TIAA-CREF, which had been incumbents. It dropped AXA Equitable, Vanguard Group, VALIC and Lord Abbett & Co.


• Pennsylvania State University, State College, consolidated administration of its two 403(b) plans and one 457(b) plan — with combined assets of $3 billion — with TIAA-CREF, dropping four other incumbent providers: Fidelity, VALIC, Vanguard and AXA Equitable.


• Purdue University, West Lafayette, Ind., consolidated record-keeping with Fidelity for its 403(b) plan and 457 plan, with combined assets of $2.4 billion. Fidelity had been one of five incumbents. The others were TIAA-CREF, VALIC, Lincoln Financial Group and American Century Investments.


• The University of Oklahoma, Norman, consolidated administration of its 403(b) plan — as well as two 401(a) plans and one 457(b) plan — with Fidelity. The plans have aggregate assets of $1.3 billion. Previously, there had been 30 record keepers for the 403(b) plan, including Fidelity.


• The University of Missouri, Columbia, selected Fidelity as the sole administrator for its two 403(b) plans, a 457(b) plan and a 401(a) plan. The plans have aggregate assets of $830 million. Fidelity has been one of 10 providers for the 403(b) plans.


• Mount Holyoke College, South Hadley, Mass., chose ING U.S. Retirement Services to administer its 403(b) plan and a 457 plan, with combined assets of $250 million. ING replaced three providers — Vanguard Group, TIAA-CREF and Fidelity.

Consultants and providers say consolidation also aids sponsors in improving education and communication. “Consolidation means there's one source of communication rather than multiple vendors competing for participants,” Mr. Masterson said.

Mr. Masterson predicted that consolidation will continue as 403(b) sponsors shift to a greater emphasis on an institutional model from a retail model. That means institutional investment pricing vs. retail pricing and group contracts replacing individual contracts, he said.

A recent study by the Plan Sponsor Council of America, Chicago, and sponsored by the Principal Financial Group, Des Moines, Iowa, said 5.4% of 403(b) plans consolidated providers in 2011.

On average, plans that consolidated providers cut the number to two from five, according to the survey of 579 executives that was conducted in October. Among sponsors with 1,000 or more participants, the consolidation rate was 14.1%.

The PSCA survey also said 4.3% of plan executives said they expect to consolidate the number of service providers next year; among sponsors with 1,000 participants or more, the expected consolidation rate was 9.4%.

More than one-third of Fidelity's 403(b) clients have gone through some consolidation in recent years, said John Ragnoni, executive vice president for tax-exempt retirement services at Fidelity Investments, Boston. “We're seeing a lot more RFIs and RFPs in the marketplace.”

Mr. Ragnoni said large providers have an advantage when 403(b) plans consolidate vendors because they can provide stronger investment educational support and a greater choice of less costly investment options. With a single provider, “sponsors can have much better ownership and control of their plans than if they are dealing with 10 different providers,” he said.

The 403(b) market reached $750 billion in plan assets by year-end 2010, up from $700 billion at the end of 2009, according to the latest available data from Cerulli Associates, Boston. TIAA-CREF is the dominant service provider, said Alessandra Hobler, a Cerulli analyst. It had a 35.1% market share in 2010 and a 34.6% market share in 2009.

At the end of 2010, Ms. Hobler said Fidelity had the second highest market share with 11.1%, followed by VALIC, 5.7%; ING, 4.1%; and Metropolitan Life Insurance Co., 3.8%.

Although higher education represents the biggest portion of the 403(b) market — $372 billion in assets, according to Cerulli — and offers many of the biggest targets, providers are taking aim at smaller markets, too.

TIAA-CREF, for example, has increased its focus on plans that have $20 million or less, Mr. Moslander said. Government and the kindergarten-to-12th-grade school markets have the biggest growth potential, “especially as school districts see the benefits of consortiums, competitive bidding, centralized control and governance,” he added.

Executives at ING and MetLife said the K-12 market is an important target for them, as well. “Many school districts have had 40 to 50 providers before consolidation,” said Brian Comer, president of public markets for ING U.S. Retirement, Windsor, Conn.

His company, which also focuses on private universities, concentrates primarily on plans with assets between $50 million and $500 million. ING's largest 403(b) plan has more than $3 billion in assets and more than 50,000 participants, while its smallest plan has $500,000 with five participants, Mr. Comer said.

MetLife's clients range from large urban school districts to small local districts, said Thomas G. Hogan Jr., senior vice president of MetLife Resources, Somerset, N.J., a division that provides products and services to education, medical, foundations and non-profit organizations.

“Consolidation is an exercise in risk management” for sponsors, Mr. Hogan said.

According to Cerulli Associates, health care represents the second largest 403(b) market, with $141 billion at the end of 2010. Cerulli predicts health care should be the fastest-growing market over the next five years because hospitals and other institutions are shifting to DC plans after having frozen their defined benefit plans.