Still Considering Vendor Consolidation?

August 4, 2009 (PLANSPONSOR (b)lines) - The new world of 403(b) retirement programs has dramatically changed the role of sponsors offering the plans, and will likely encourage sponsors to engage with providers in new ways so that they can manage their plans more easily.
By PS

W ith the role of compliance sitting squarely on the shoulders of sponsors, many that typically provided a number of vendors to plan participants may look to a singlevendor to help make the process easier for them.With the anticipated vendor consolidation in the marketplace, plan sponsors can request morecompetitive products from one vendor and receive more comprehensive administrative and regulatory support.

Why consolidate to a single vendor?

An exclusive relationship will lend itself to group enrollment meetings, more sophisticated use of technology for enrollment, and more consistent investment education and advice for participants.   These services can sometimes lead to less face-to- face services – depending on the service provider – but can be delivered efficiently and for less cost to the employer and employee. In short, through an exclusive relationship, the service provider can focus on education and preparing participants for retirement and will not need to focus on “selling” their product to participants.

An exclusive provider will be more willing to contract with a plan sponsor to perform the necessary compliance, filings, and plan document preparation. These services are also available in a multi-vendor environment through common remitter services but will require additional coordination from the plan sponsor.

In an exclusive arrangement, it is easier to negotiate lower administrative and investment fees using the size and prestige of the plan as leverage. In an exclusive open-architecture environment, this can be accomplished while at the same time receiving a multi-managed retirement program. In an exclusive bundled environment, it is easier to understand the fees associated with the retirement program since one service provider will be the focal point to all the fees and revenue collected by the investment providers and other service providers.  

Participant Backlash

If a plan sponsor wants to engage with an exclusive vendor, some employees may resist the change and want to continue to make contributions to their existing account. In this case, plan sponsors who desire a single vendor should gain broad consensus on criteria throughout the decision-making process.   This is especially true where unions are involved or where a strong relationship exists between a group of employees and the displaced vendor. Sponsors should make sure they have access to product comparisons to be able to demonstrate the benefit of the single vendor relationship.

Participant communications should also include the benefits gained by the single vendor relationship. Plan sponsors should m eet with all stakeholders and develop a comprehensive communications program that ensures the changes of the retirement program are delivered positively by senior management.

When to Stick with a Multiple Vendor Plan

Many plan sponsors may not be able to prioritize the resources necessary to convert to an exclusive vendor in the next few years. If this is the case, it is best for the plan sponsor to stay in a multi-vendor environment for a year or two before moving to an exclusive relationship. If the plan is a supplemental savings plan and will not be used as the employees’ primary retirement vehicle, a multi-vendor environment may be more suitable to the sponsor’s needs and the needs of participants.

Bob Melia, VP, Product Strategy for Retirement Solutions, Lincoln Financial Group

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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