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Separate or Together.

Byline: Elayne Robertson Demby

Summary paragraph: To bundle, or not to bundle: That is the question

Traditionally, nonqualified deferred compensation (NQDC) plans were the odd man out when it came to the bundling and outsourcing of retirement plans. Administration and recordkeeping of qualified defined benefit (DB) and defined contribution (DC) plans have been routinely bundled and shipped out for total retirement outsourcing (TRO) for well over a decade. However, NQDC plans were typically absent from that package.

That is changing. "We are now seeing a lot more Requests for Proposals to combine both the qualified and nonqualified plans," says John Baergen, vice president of nonqualified benefits for Principal Financial Group.

Driving the trend is sponsors' desire to create a user-friendly experience, so employees can avoid navigating multiple websites, says Bryant Kirk, chief operating officer at The Newport Group. Now that employees have become used to logging in to one website to view all their qualified benefits, firms want vendors to provide the same capability to employees in NQDC plans. But, says Kirk, while bundling is done primarily for employees, it also benefits sponsors who want to avoid dealing with multiple vendors.

Some argue, however, that bundling NQDC plans with qualified plans is not such a good idea. Others defend the practice of bundling, while yet another group stipulates that it depends on the situation. When advising clients as to what to do with their nonqualified plans, advisers should be aware of all the arguments, pro and con, for including NQDC plans in the TRO bundle.

Bundling of NQDC in the TRO package is a recent development. Historically, says Baergen, if administration and recordkeeping of the nonqualified plan were outsourced, it was to a firm that specialized in nonqualified plans. That is because, until recently, it was rare for a qualified plan vendor to be in the nonqualified plan business, says Heidi O'Brien, a partner in Mercer's Executive Benefits Group. However, she says, over the last decade, many qualified plan providers expanded into providing services to nonqualified plans.

Integrating those services is even more recent. Only within the last four to five years has there been integration between qualified and nonqualified plans in the same platform, says Baergen.

Even with vendors entering the marketplace with the capability to bundle, however, the strategy has yet to catch on among plan sponsors, says Peter Starr, chief executive officer of Chatham Partners. It seems that definitive statistics showing just how many firms bundle their NQDC plans with their qualified plans when outsourcing are nonexistent. But, according to a 2011 Chatham survey of 258 firms, just 19 (7.6%) bundled their defined benefit NQDC plan with their qualified defined benefit plan when they outsourced. (Chatham has no data on the number of firms that bundled and outsourced their defined contribution NQDC with their qualified NQDC plans.)

Yet, vendors that provide the bundling service find it to be popular. According to Gary Dorton, vice president of nonqualified benefits at The Principal, approximately 60% of the company's NQDC business is part of a bundled TRO arrangement.

One clear advantage to bundling is cost. Bundling, says Baergen, creates efficiencies, and that leads to savings. As you bundle more services with the same provider, you can get economies of scale, says Graham. If you unbundled the two and then paid two different administrators, the sponsor would likely be paying more, says Richard A. DeFrehn, vice president and administration consulting practice leader at Sibson Consulting.

But those savings come about only if certain synergies are present. Bundling is the better option when there is a relationship between the qualified plan and the NQDC plan, because it is more efficient for one vendor to do the same work, DeFrehn says.

For example, if the NQDC plan is a mirror plan of the 401(k) plan, says Baergen, the opportunity for synergy exists, and real efficiencies could result from bundling the two, particularly if both plans use the same funds. This, of course, means that excess benefit plans using the same investments as the 401(k) are the most popular type of NQDC plan to be bundled.

Yet, some argue, even when the qualified and nonqualified plans seem similar, differences will be found. While a 401(k) restoration program may be designed to mirror the qualified 401(k) program, the reality is the administration and recordkeeping of both programs differ markedly. In the large-plan market, says Kirk, providers will often take on a nonqualified plan as an accommodation and recordkeep to the best of their ability. The provider, however, may be unable to render all the services that employees and sponsors need, such as financial reporting of the nonqualified plans.

Additionally, notes Kirk, a new trend is to provide participants with a product that seems bundled when they interface with it, but in actuality, services are provided by separate qualified and nonqualified plan providers. For instance, he says, a provider will take on a nonqualified plan to create a bundled approach and then outsource the actual work to a specialist firm such as Newport to provide the additional services. The plans will appear bundled, from a participant standpoint, says Kirk, but the specialist firms will wrap other services around the bundling.

Conversely, when the nonqualified plan has a different fund lineup from the qualified plan or does not mirror it, having different administrators can make sense because synergies may not exist, allowing for economies of scale and cost savings. "When the formula for the NQDC is different from the [qualified plan], it might be better to find a service provider that can provide services to executives that the qualified plan vendor cannot provide," says John K. Graham, vice president and regional director of compliance research for Sibson Consulting.

The complexity of the nonqualified plan is another consideration, says O'Brien. The more complex, the more likely it is better to be handled by a specialty firm and not bundled, she says. If, for instance, the NQDC plan is funded with corporate-owned life insurance (COLI), a 401(k) provider may lack the expertise to administer it and a specialty firm may be more appropriate. "Traditional 401(k) providers typically don't have the level of expertise with COLI that a specialty firm would," says O'Brien.

Size also matters. If, for example, a company employs 1,000 people but only five participate in the nonqualified plan, few advantages may result from bundling, says Baergen. If, however, 100 employees participate in the nonqualified plan, bundling may be justified because of added efficiency, he says. The size of the plan sponsor is not as important as the size of the nonqualified plan -- the smaller the nonqualified plan, the less opportunity for synergies, he says.

Additionally, while bundling is a simpler approach and usually allows employees to visit just one website, says O'Brien, the downside is that the quality of expertise and services for the nonqualified-plan participants may suffer. When evaluating if bundling is appropriate, advisers should consider the level of services the sponsor wants to provide to executives, says O'Brien. If that is a high level of service, a specialty firm may be more appropriate. For example, she says, it is more common for a nonqualified specialty firm to sit down with executives to discuss options than for qualified plan vendors to do so.

Advisers should also consider whether the company is a private or public firm, says Baergen. Confidentiality is less of a concern for a large public company because nonqualified arrangements must be disclosed in the proxy. In a private firm, however, even human resources may be uninformed about the specifics of the nonqualified plan, and that might lead to a preference not to bundle, he says.

Another consideration, says Baergen, is how often the plan sponsor wants to put both the qualified and the nonqualified plans out to bid. If current practice is to reassess the outsourcing of the qualified plan more frequently than the nonqualified, or vice versa, consideration should be given to whether the sponsor may want to put both on the same Request for Proposal schedule.

Deciding the appropriateness of bundling for a client is always a matter doing due diligence, says Graham. "I think the key thing advisers have to understand is what the employer wants to provide executives," says DeFrehn, "then find the best way to offer those services." Even if bundling makes sense, best practices dictates that advisers look to ensure that sponsors are getting the best arrangement for their circumstances, he says.

"There isn't a right answer," agrees Kirk. "It depends on the circumstances of the plan sponsor."

Timing may also play a part. "Bundling has evolved over the years," says O'Brien, "but my sense is that it's still evolving." Down the road, she says, 401(k) vendors may invest more in nonqualified expertise, so they may have the knowledge and services needed to deal with sophisticated plans.

When Not to Bundle

According to Gary Dorton, of Principal Financial Group, sometimes bundling of NQDC plans will not be the preferred route for a plan sponsor. Among chief reasons are:

* The NQDC plan is a small targeted plan, to the point where no synergy is gained by linking;

* The nonqualified plan is extremely confidential and run by a different group from other benefits plans, so separation is desired by the plan sponsor;

* The qualified plan needs to be re-evaluated periodically, due to fiduciary standards, and the sponsor wants the NQDC plan to remain unaffected if a change must be made. Alternatively, the sponsor could wish to protect the qualified plan from a problem affecting the NQDC plan; and

* The best qualified-plan platform for the plan sponsor's 401(k) or other defined contribution plan offers inadequate NQDC services.

Advisers should review these factors with their clients to see whether any apply, prior to recommending bundling.
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Date:May 1, 2012
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