Sponsor Considerations Loom Large in Provider Outsourcing Decision: Report

July 8, 2003 (PLANSPONSOR.com) - Plan sponsors concerned about becoming a "victim" of outsourcing by their providers might glean insights on the trend in a new report on the trend from McHenry Consulting.

The good news – providers are apparently interested in avoiding both changes to investment choices available to their clients, as well as their fee schedules, according to the report.   Asked to identify the important issues in selecting an outsourcing partner, nearly two-thirds cited maintaining investment choices, while nearly half (48.44%) cited keeping their existing fee schedule.   Of additional comfort to plan sponsors, the report noted that one of the two questions posed “over and over” by vendor respondents about the outsourcing decision was, “If I outsource my existing cases, what happens to my clients?”.

Profit Ability?

Of course, one should not be surprised to discover that the most important criteria in evaluating the move was “increasing profitability,” noted by more than 67% of the survey respondents (the other critical outsourcing question was “How can my non-expert salespeople get on-site sales support?”).  

Also noted as key considerations were:

  • 47.22% – keeping their existing wholesalers (controlling distribution means controlling revenues, according to the study’s authors)
  • 43.75% – having only their name on client materials and communications
  • 43.55% – keeping their existing administrative personnel
  • 41.94% – having a specialty outsourcer for only those plans that they don’t want to or cannot profitability service

Of potential concern to plan sponsors were signs that providers are viewing the growing array of free, but “expensive plan features” as a mistake – with at least one firm considering charging for services that had previously been free.   Additionally, McHenry notes that “a lot of firms are considering dramatic fee increases in the face of changing economics of their business model.”   The report characterized the current environment as a “re-run of the era when the asset-based revenue assumptions of plan administration dissolved” along with the emergence of mutual fund supermarkets.

Expected Findings

The report highlighted some “expected findings” from the provider perspective, including:

  • If you’re losing money, you can’t fix it by doing more of the same thing.
  • There’s a lot of money in retirement accounts, but not much in servicing them.
  • Perhaps 5% of investment salespeople in the retail market are really specialists in ERISA service sales.
  • Accepting “inappropriate” (bad) business is bad business.
  • 80% of the problems arise from 20% of the clients.

However, the survey also highlighted some "new" findings, which may have resonance to many who are in, or who have worked with the provider community, including:

  • A lapse in institutional memory, with providers "trying new strategies which are - apparently unknown to current decision makers - retreads of what's been done before."    McHenry notes that business decisions are often made without the input of middle managers, who, "in the case of retirement plan services…are the ones who 'get it.'"   The study says the "number crunching plan administrator types don't move up the management hierarchy," and their knowledge is "not finding its way upstream."
  • Unrealistic sales goals - including mandates to grow plan count and assets by more than 25% - and "knee jerk" reactions to missed profit problems.
  • Corporate culture is an issue
  • Outsourcing partners wrestling with the same problems the provider thought they "off-loaded"
  • An increase in the number of plans-per-administrator, due to both leveraged technology and increased workloads

The report notes that outsourcing is "working" from the providers standpoint, at least in terms of shoring up profitability.   Eric Wagner, the study's principal author and McHenry's Director or Research, notes that even firms that have resisted outsourcing have "generally maximized available operating efficiencies.

On the other hand, Wagner notes "…a lot of unusual movement in the retirement plan services market during the last year.   Sadly, our results to date also reflect a lot of disillusionment and unhappiness with the current state of affairs."

You can view the report online (it's free) at  http://www.mchenryconsulting.com/research/buyers_guide.pdf .   You will be asked to provide a name and email address.