Bundling Trend Running Out of Steam?

May 8, 2009 (PLANSPONSOR.com) - The move toward bundling of defined benefit plan services may have run its course, according to a new survey.

Only 6% of plan sponsors with unbundled defined benefit (DB) plans intend to bundle any of their plan’s DB services in the next two years, compared to 14% in 2005, according to Chatham Partners, which has conducted four research studies assessing the trend toward outsourcing and bundling benefit plan components since 2001.

According to an announcement, the most recent study, released earlier this month, entitled “The Long March: Strategies to Accelerate Growth in the Retirement Outsourcing Market”, reveals that the retirement outsourcing market has not turned the corner toward a period of rapid adoption of bundling. However, Chatham says that the bundled retirement outsourcing growth opportunities remain for retirement plan providers willing to refine their marketing, sales, and product development efforts to align with plan sponsors’ evolving needs.

“Comfort” Zones

According to the report, regardless of their bundling status, plan sponsors are increasingly “comfortable” with the cost, time, and resources associated with administering their benefit plans. In 2005, 68% of plan sponsors reported “comfort” in these areas versus 77% in 2008.

Providers have made progress convincing plan sponsors who were already receptive to bundling about certain benefits associated with bundling. For example, both semi-bundled and fully bundled / TRO / TBO respondents are more likely to agree in 2008 that bundling saves time and resources (56% vs. 34% in 2005 and 74% vs. 62% in 2005, respectively), according to the report.

While cost savings and efficiency remain the most important reasons sponsors give for bundling in 2008 (mentioned as the most important reason for bundling by 39% and 17% of sponsors, respectively), other key reasons vary by a plan’s bundled status. For example, fully bundled plans place great value on having a single point of contact, while semi-bundled plans place much greater emphasis on the opportunity to improve participant services, according to the report.

As a group, bundled plan sponsors question the ability of providers to deliver a consistent service experience across the bundled offering. Consider that bundled plan sponsors report considerably lower satisfaction levels with their DB providers in 2008 (63% vs. 77% in 2005), but higher satisfaction levels with their DC providers (85% vs. 77% in 2005). Intermediaries echo these sentiments, as only 13% believe that service quality is consistent across components of a bundled package.

External "Motivations"

Additionally, according to intermediaries, external forces - namely regulations and market conditions - are motivating plan sponsors to identify new ways to manage the risk associated with their benefit plans. In particular, respondents mention that many plan sponsors are shifting to liability driven investment (LDI) strategies, freezing or terminating DB plans, and seeking more conservative investment approaches.

Chatham's research indicates that, although the bundled retirement outsourcing market is reaching maturity, opportunities still exist among plans that have bundled some services. Among semi-bundled plans, nearly one-in-five (19%) state that they are likely to bundle additional DB services in the next two years. In addition, fully bundled DB plans - and plans that have bundled DC or Health & Welfare services with their DB plans - "have never been more likely to switch providers, creating an opportunity to poach clients from competitors," according to the report.

"It was somewhat surprising to see that so few unbundled plan sponsors have any intentions of bundling in the future. They remain unconvinced that the benefits of consolidating with a single provider outweigh the risks. So, the key message in our research is that providers that are committed to this market must re-visit the retirement plans they target and the value proposition they articulate, not to mention the services offered in the bundled package itself. In the future, it will be less important for providers to emphasize the benefits of bundling and more important to convert sponsors with experience bundling into true believers," said Andrew McCollum, a Managing Director at Chatham.

The 125 page report's foundation is in-depth online surveys completed by 297 plan sponsors affiliated with defined benefit plans ranging in size from $1 million in assets to more than $1 billion in assets and interviews with 16 investment consultants and financial advisors.

For more information about this research study, you can contact Andrew McCollum at amccollum@chathampartners.net or call (781) 314-0607.