The evolution of defined contribution plans has led many companies to follow in the footsteps of their defined benefit counterparts, increasing the use of consultants both for plan design and investment manager selection.
But defined contribution plan executives are having trouble finding a "one-stop shop" that can objectively answer questions about both investment management options and complicated administrative and record-keeping issues.
Traditional investment management consultants - accustomed to providing defined benefit plans with money manager selection, performance and monitoring services - are relatively inexperienced when it comes to the complex 401(k) world.
Yet complicated reporting and compliance requirements, a multitude of service providers and nervousness about potential fiduciary liability have made it difficult to operate without the advice of external experts, say defined contribution plan executives.
Downsizing in many corporations has resulted in a shortage of internal resources for thorough due diligence and research on issues of plan design, vendor selection and performance monitoring of 401(k) investment options. Accompanying the trend toward outsourcing for administrative and investment management services is a movement by 401(k) plan sponsors to seek outside advice on selection of vendors for those services.
"This evolution in defined contribution plan management began happening about three years ago, when the decision-making power for 401(k) vendor selection was still primarily in the hands of employee benefits staff," said Ruth Hughes-Guden, a vice president and consultant at Rogers Casey & Associates, Darien, Conn. "It was natural for those staff to seek advice from record keepers and administrators - those companies they were most familiar with."
"But as the treasury department staff have become more involved, there's been a move in the last few years for more advice to come from the investment management side of the consulting industry."
Tambrands Inc., White Plains, N.Y., was convinced by its defined benefit plan consultant - Evaluation Associates Inc., Norwalk, Conn. - to use EAI as a consultant when the company began to search for a bundled provider for its $30 million 401(k) plan. "They gave us a deal we couldn't refuse and really modified their fees down a lot to convince us to use them," said Patrick Russo, manager of Tambrand's employee benefits department.
At the time, EAI performed five defined contribution plan searches, said Mr. Russo. Tambrands was uncomfortable with EAI's lack of expertise, but Mr. Russo said the situation worked in the end because of his own long experience with record-keeping issues and new plan implementations at previous employers.
Tambrands is close to selecting a new bundled service provider.
Most of the major employee benefit consultants, with a background of record-keeping services, have set up mutual fund alliances to provide a bundled program for 401(k) plans. But many plan executives say they are uncomfortable with the conflicts of interest they believe are inherent.
"There is a fundamental conflict of interest within any entity which acts as a consultant and whose compensation may derive from the ultimate vendor choice of the client, whether it's for a bundled product or record-keeping services, if that consultant also offers those services," said Ian S. Kopelman, the partner who directs the employee benefits group of the law firm Shefsky & Froelich Ltd., Chicago.
"It's not reasonable to expect that a consultant who helps a company with plan design will make a functional analysis of that company's needs which will cut the consultant's services out of the process," said Mr. Kopelman, who is also a member of the legal and legislative committee of the Profit Sharing Council of America.
When the Grass Valley Group Inc., Grass Valley, Calif., revamped its $35 million 401(k) plan, the focus group designing the new plan worked with William C. Gross, a consultant and principal at Sacramento Valley Insurance Co., Sacramento, Calif.
James J. Shields, Grass Valley's director of compensation and benefits, said corporate downsizing left him with few internal resources to conduct the search. "Our consulting situation was very relationship-driven. We really liked Bill - he's very smart and very objective. We could trust him to pre-screen candidates according to our precise criteria," said Mr. Shields.
Grass Valley considered using an employee benefits firm as a consultant, but "we didn't want to pay the price a company like Hewitt (Associates) would charge us," Mr. Shields said. "Consulting services from those kinds of vendors were very expensive and we just didn't want to work with a company that had services of their own to sell to us."
Daniel J. Esch, formerly a consultant at The Wyatt Co., New York, said he was frequently asked by pension clients how objective he could be because he worked for a service provider.
At Wyatt, Mr. Esch worked with many clients on issues of plan design and record keeping, sometimes in situations where Wyatt was excluded from bidding on business for a consulting client, but more often than not when Wyatt's services were open for consideration within the search.
"The market is at the point now where the boutique investment management consultants are having trouble building up expertise on the administrative side. On the other hand, employee benefit consultants have developed mutual fund alliances which really bring into question their objectivity."
Since leaving Wyatt, he formed Esch Consulting, Minnetonka, Minn. Mr. Esch said he decided to open an independent consulting firm after years of seeing clients search, often in vain, for objective advice.
"There's a big demand for objective consultants, which can handle both sides of the question," said Mr. Esch.
Meanwhile, other plan executives are finding ways to pull together the internal and external expertise needed for their 401(k) plans.
Bull HN Information Systems Inc., Billerica, Mass., has been working with Rogers Casey in revamping its $250 million 401(k) plans. Bull HN wants a bundled provider for the plan, including investment management, record keeping and communication services. Brian Byrne, Bull's treasurer, said the company sought in-depth advice from an outside consultant "just to make sure we weren't missing anything as we redesigned the plan."
Rogers Casey was selected primarily because it has the reputation for being unbiased, Mr. Byrne said. "The expertise of the firm is very much in investment management. Where they've been weaker has been on administrative issues. Rogers Casey's advice on the selection of mutual funds for the plan has been very helpful and where they've been lacking on the record-keeping side, our own internal staff has been able to step in."
The Williams Cos., Tulsa, Okla., solved the dilemma by working with consultants on both the administrative side and the investment management side, when the $320 million 401(k) plan was redesigned in July 1993.
Brenda Hayes, senior benefits analyst, said the company initially went for advice to First Interstate Bank of California, Los Angeles, with which the company had had a corporate banking relationship. The Williams Cos. had been using a Tulsa bank for trust and record-keeping services, but the bank could not support the daily funds valuation the company wanted to introduce.
First Interstate recommended an alliance it had arranged with record keeper Howard Johnson & Co., New York. The company evaluated the program, decided to use the alliance and engaged Howard Johnson as a consultant on administrative issues. "Howard Johnson was very helpful with record-keeping issues, especially on setting up the operations of the plan," Ms. Hayes said. The First Interstate-Howard Johnson alliance also offered mutual funds, but the Williams Cos. recognized early that it also wanted other options.
The company hired a separate investment management consultant - Wurts, Johnson & Co., Seattle - to help select appropriate mutual funds. Wurts, Johnson helped identify the funds and negotiated the contracts with the vendors, said Ms. Hayes. Wurts, Johnson also helped determine which mutual fund options within the alliance should be offered.
Affording a consultant at all can be difficult for small and medium-sized defined contribution plans. Many large plans use investment management consultants in an unbundled approach, but most small plans are moving to a bundled approach and can't command the same level of service.
David Hildebrandt, a senior partner at the law firm Dow, Lohnes & Albertson, Washington, and legal counsel for the Profit Sharing Council, said: "There are definitely not enough qualified consultants serving the small and medium-sized plan market. From a cost perspective, many small plans can't afford external advice, but they are the very plans which need it most because they are likely to lack internal resources to objectively evaluate vendor options."
The long-term cost savings of using a consultant could help offset initial fees, said Mr. Esch. Small plans might find a consultant can negotiate more effectively with vendors on contract issues. Outsourcing the search function to a consultant with a broad knowledge of vendor products also will save staff time, making the search more economical in the long run, said Mr. Esch.