Employers consolidate benefits; employees seek 401(k) investment advice: more companies are expressing interest in consolidating defined benefit services and total retirement outsourcing solutions. This article looks at the trends and offerings.

Trends and prospective changes for 2004 in terms of investing in 401(k) plans are not as dramatic as what is happening in the health care arena.

For employers, the bundling of services is becoming more common. For employees, the option to hire a fee-based financial advisor to assist in determining the allocation and management of 401(k) funds has become available.

Bundling Services

The Principal Financial Group[R] announced through a third-party study that there is strong interest by companies in consolidating defined benefit services and total retirement outsourcing solutions.

"Lower investment returns and corporate downsizing are driving firms to seek lower cost alternatives for administering their retirement plans," said Curt Kohlberg, President, Chatham Partners, a provider of strategic advisory services and market research to the financial services industry. "Additionally, funding concerns for DB [defined benefit] plans and growing fiduciary liability for DC [defined contribution] plans have caused a shift to bundled solutions," he said.

The study conducted by Chatham and based on interviews with 475 plan sponsors and 14 leading service providers, revealed that firms which already bundled cited a number of benefits, including significant cost savings, administrative efficiencies, better services for plan sponsors and participants, and greater accountability from the bundled provider. These are the same driving factors, Kohlberg said, for plan sponsors who are considering a shift to a bundled platform. By far, cost savings in the current environment was mentioned as the primary case for interest in bundling services (mentioned by 36 percent of respondents).

According to the Chatham report, the market is ripe and growing for bundled solutions. The survey revealed that 40 percent of the country's DB plans (with assets of $1 million to $10 million) "already use bundled DB or total retirement solutions, while 60 percent of the market remains unbundled. Chatham predicts that up to 20 percent of DB plan sponsors are likely to bundle services in the next year or two.

Managing Accounts

A growing number of employers are giving workers the option of having a professional mutual-fund picker manage their retirement accounts. "These services offer to tailor a plan for each employee, monitor it and make changes based on market conditions, an employee's age, risk tolerance and financial goals," reported The Wall Street Journal (WSJ).

Big financial services companies, including Fidelity Investments, the nation's largest mutual fund firm; insurer American International Group Inc.; brokerage bigfoot Merrill Lynch & Co.; and banking giant Wachovia Corp. have rolled out such services.

WSJ said the downside is that fees can be steep, often doubling what plan members are now paying in mutual-fund management expenses. "And while there are some safeguards in place, plan administrators have an inherent conflict of interest in providing such advice; they could wind up favoring the mutual funds they manage, instead of potentially superior alternatives," according to WSJ.

The article said employers should consider liability issues before implementing such a plan. A recent court decision involving the Enron Corp. retirement plan shows that companies could be held responsible for poor decisions by employees. "A federal judge in Texas ruled that former Enron Chairman Kenneth Lay and Northern Trust Corp., trustee of Enron's 401(k) retirement plan, can be sued under federal pension law for allegedly failing to protect Enron employees, whose retirement plan was more than 60 percent in Enron stock before it crashed," WSJ reported.

Financial research firm NewRiver Inc. forecasted that 5 million 401(k) plan participants will be offered this option by 2005. NewRiver expected 1 million people to invest $48 billion in managed retirement accounts by then, representing a huge opportunity for financial services vendors.

"This is likely the next big thing in 401(k)s," said William Armone, a partner with consulting firm Ernst & Young in New York.

Fees for managed retirement accounts are all over the map. Based on its survey data, NewRiver said plans most commonly levy an annual fee of 0.2 percent to 0.75 percent of assets--or between $200 and $750 on a $100,000 account.