During such volatile times, when plan sponsors, especially in higher education, are under pressure to find solutions that balance organizational fiscal imperatives with employee needs, a simplified plan design is emerging as a highly attractive option. A vital first step on the path toward simplification is vendor consolidation.
Like their counterparts in the health care industry, plan sponsors in higher education are aware of the critical role strong employee benefits programs play in the recruitment and retention of the most talented faculty and staff. To remain competitive, such plans typically must include multiple retirement, health, and welfare options. Historically, ERISA and non-ERISA 403(b) plan sponsors in the higher education market have offered their participants access to multiple investment providers, all in the name of maximizing choice. At some larger institutions, plan providers have numbered in the dozens. However, the requirements of the latest 403(b) regulations—including plan document creation, recordkeeping, data sharing, and transaction oversight—mean that the complexities of plan administration and compliance monitoring increase exponentially with the number of vendors.
Today, when an open-architecture plan design with a single provider of recordkeeping services can provide participants access to hundreds of investment options from multiple providers, reducing the total number of vendors in a plan to as few as possible simply makes sense. Paring the number of vendors isn’t always easy, but for many plan sponsors, it’s becoming a necessity.
This Fidelity Market Insights Brief presents:
- The benefits and opportunities afforded by vendor consolidation
- Stories of success from those who have reduced the number of vendors
- A guide to starting the process
Owing to the rigor demanded by today’s 403(b) regulations, plan sponsors are realizing that reducing the number of vendors in their plans is becoming a virtual necessity. With more than two vendors in a plan, the challenges inherent in compliance and administration are magnified, particularly in such areas as:
- Vendor management—Maintaining relationships with multiple vendors, each likely to have different processes, procedures, forms, kits, and file formats, requires a substantial commitment of HR and benefits resources.
- Transaction monitoring—Plan sponsors are obligated to monitor and approve all loans, hardship distributions, and catch-up contributions. With multiple vendors in the mix, the risk for noncompliance is heightened substantially. While outsourcing such oversight is an option, it can be an expensive one.
- Plan reporting—Although highly desirable, reliable plan-level reporting is essentially unattainable in a multivendor environment. Instead, plan sponsors must compile data manually from each provider and attempt to aggregate and reconcile in a laborious process. Lack of consolidated reporting complicates accurate plan analysis and performance evaluation.
- Investment oversight—Identification of available investment options, as required by the 403(b) regulations, is often a new experience for plan sponsors. Proper oversight of multiple, potentially redundant, investment choices can be a daunting task when several vendors are part of a plan. Further, too large a number of investment options can actually deter participation, as employees may be put off by multiple enrollment forms and confused by potentially competing messages from different vendors.
Simply put, vendor consolidation can deliver a host of benefits for employers and employees alike.
Plan sponsors can benefit from:
- Enhanced efficiency through relationships with fewer, more strategic investment providers and a more manageable lineup of investment funds
- Cost savings from reductions in time and resources spent on vendor management and plan administration
- The potential to automate and outsource certain administrative duties, resulting in reductions in paperwork and manual processing
- Improved plan reporting and analytics, enabling more strategic plan management and better decision making
- Simplified fiduciary review and compliance monitoring of loans, hardship distributions, and other withdrawals
- The ability to “brand” the plan, simplify enrollment, and drive increased plan participation
Plan participants can benefit from:
- User-friendly enrollment, which can be consolidated through a single provider even if a plan includes more than one active vendor
- Clearer understanding and direction of investment options resulting from consolidation of transactions with fewer vendors
- Simplified retirement planning and account management
It’s important to note that any degree of vendor reduction can yield these benefits, but consolidation to one or two vendors provides a unique opportunity to experience even greater plan efficiency and helps to lower a sponsor’s fiduciary and compliance-related risk.
Plan sponsors reluctant to move to a single vendor out of concern for limiting choice or disrupting longstanding relationships should strongly consider a two-vendor model. A move to two vendors can allow for centralized remitting of participant data and contributions, integrated communications and education programs, simplified investment offerings, 403(b) audit support, and integrated compliance services while still providing participants with the choice they value.Ultimately, regardless of the final number of providers, vendor consolidation has been shown consistently to deliver administrative savings for plan sponsors and simpler plan interactions for participants.
Despite its many benefits, simplifying a plan through vendor consolidation is not necessarily simple. Nevertheless, plan sponsors at institutions throughout the country have navigated the process. Their reasons for doing so vary, their approaches differ, and their goals and objectives may be unique to their organizations. But what these plan sponsors have in common is that they are succeeding—and benefiting in the process.
Fidelity research conducted during the first quarter of 2010 among 20 tax-exempt organizations that have recently worked through vendor consolidation reveals some interesting and important aspects and outcomes of the process of consolidating the number of plan providers:
- Plan sponsors are using the new 403(b) regulations to their advantage—The vast majority of plan sponsors at these surveyed organizations report that therequirements of the new IRS 403(b)regulations have provided both the opportunity and the justification to consolidate vendors in the pursuit of administrative and fiduciary simplification. Most say that consolidation was overdue but likely could not, or would not, have occurred in the absence of a new regulatory environment.
- The plan participant experience is better—Plan sponsors report that, post consolidation, their employees are benefiting from less confusion as a result of fewer vendors in the mix. Redundancy of investment options and inconsistencies in messaging to participants are reduced. Moreover, in cases of consolidation to a single vendor, institutions are able to take full advantage of auto-enrollment and auto-increase programs to help optimize employee participation and savings rates.
- Vendor relationships are improved—According to surveyed plan sponsors, paring the number of providers has resulted in deeper, value-added relationships. Many plan sponsors say they now feel as though they have established mutually beneficial “partnerships” with their selected vendors.
- Administrative burden is lessened—Vendor consolidation is bringing new efficiencies to the payroll and benefits offices of the surveyed organizations. In many instances, plan sponsors report that with fewer vendors to track, benefits and HR staff are able to address other more strategic activities and initiatives.
- Costs can be reduced— With a reduced number of vendors in the equation, plan sponsors are better able to negotiate fees. Many plan sponsors are now reporting lower overall cost resulting in an improved cost-per-participant ratio.
While these general findings are certainly informative, the following stories of vendor consolidation at two institutions of higher learning provide insight on the process in greater detail.
The University of North Carolina (UNC) is a multi-campus university composed of all 16 of North Carolina’s baccalaureate degree-granting public institutions, the nation's first public residential high school for gifted students, and UNC Health Care System.
In the UNC system, decisions around retirement plan designs had been made at the individual campus level. As a result, the system essentially had 18 unique plans that included more than 50 vendors in total. Administrators realized that pending changes to the 403(b) regulations would quickly render the status quo untenable.
Rather than face the daunting first step to complying with the new regulations by creating comprehensive plan documents and coordinated vendor agreements across 17 campuses and UNC Health Care System, UNC officials decided to solicit proposals through a competitive bid process for a system-wide plan. While driven primarily by regulatory changes, administrators also sought to simplify the plan for employees and become better plan stewards by offering employees superior investment choices, higher quality vendors, and improved oversight of funds. Although no target was set for the number of vendors to be included in a new plan, it was readily apparent that a dramatic reduction would be required if these objectives were to be met.
With the help of a consulting firm, UNC issued RFPs through a competitive process that saw five firms emerge as finalists. After carefully assessing experience as well as technological and regulatory expertise, UNC selected two vendors (including Fidelity) to anchor its new system-wide 403(b) plan. Both vendors collaborated on plan participant communications and transition support in the months leading up to the plan’s implementation on January 1, 2009.
In the wake of vendor consolidation, UNC plan administrators and participants have benefited from:
- Vastly reduced administrative burden—the shift from over 50 vendors to two and 18 plans to one has decreased the volume of paperwork as well as the number of manual transactions and data feeds requiring reconciliation
- Improved plan monitoring
- Reduced cost
- More diverse, more attractive investment offerings through reputable organizations
Increased awareness system-wide of the plan as an evolving, organic benefit ripe for future optimization as conditions warrant.
University of New Haven (UNH)is a private institution in Connecticut offering more than 80 undergraduate and 25 graduate degrees to a student body numbering more than 5,200.
UNH had already been administering a 403(b) retirement plan with a single provider, believing that a sole vendor is optimal for ease of administration as well as participant education and understanding. However, several years ago, UNH began experiencing problems with its vendor. Problems included delays in contributions updates, hit-or-miss participant enrollment, challenging Web interfaces, and the inability to perform electronic fund transfers.
UNH initiated a request for proposal from vendors in a competitive process similar to that undertaken by plan sponsors seeking to consolidate. Despite its conviction that a single-vendor service model is superior, UNH had considered adding a second provider in an effort to offer a better alternative to its employees. Changes in the 403(b) regulations, unveiled during UNH’s vendor evaluation process, convinced the university to forge an exclusive relationship.
During its review, UNH selected four finalists before choosing Fidelity as its sole provider. UNH had been concerned about the impact its decision to switch vendors might have on employee morale, particularly among long-serving employees used to the previous provider, so Fidelity worked closely with UNH to provide communications and multiple on-site education and training sessions. Fidelity’s technology solutions allowed UNH to implement automatic enrollment in pursuit of its stated goal of 100% participation.
UNH’s switch to Fidelity has led to:
- Increased participation—More than 600 new participants were enrolled during the first 12 months after the switch, and the overall plan participation rate is approximately 60%.
- Streamlined administration—By using Fidelity Plan Sponsor WebStation®, UNH’s benefits office is benefiting from markedly increased efficiencies in enrollment, compliance monitoring, and plan-level reporting.
- More engaged participants—Nearly 95% of participants access their accounts through NetBenefits,® Fidelity’s Web portal for participants, and, having availed themselves of investment guidance, 70% of participants have taken advantage of lifecycle funds. Moreover, UNH participants report satisfaction with the readability of their account statements, which had been a source of frustration with the previous vendor.
Considerations for Vendor Consolidation
Reducing the number of plan providers can be a complex, time-consuming process, but an organized approach can make the transition more manageable. Fidelity recommends that plan sponsors take the following steps when contemplating vendor consolidation:
- Evaluate your plan and review its objectives
This is the time to determine whether your plan’s performance and objectives are aligned. It may be appropriate to form an advisory board of key stakeholders to help ensure a thorough, objective review.
This step also provides an opportunity to rethink your overall plan design and the features best suited to meeting your objectives, such as a tiered investment lineup, automatic enrollment with a lifecycle fund default, single-vendor loans and hardship distributions, and elimination of the lifetime catch-up provision.
- Assess provider capabilities
Ensure that the vendors you’re considering are able to meet your needs and those of your participants, all while satisfying regulatory requirements. Consider vendors’ technical capabilities; their track records for partnering in the consolidation process and sponsor servicing; their ability to provide comprehensive communications, education, and investment guidance; and their capacity to serve the needs of your employees during the transition and beyond.
It’s also appropriate to think about a potential vendor’s capabilities and reputation beyond the narrow context of retirement. Is the vendor in question a trusted, credible provider of a broader range of products and services, such as mutual funds, brokerage accounts, and education savings vehicles? The inclusion of a provider with a lengthy record of success and a clear breadth of expertise can help reassure participants that the consolidation process was a carefully considered one.
- Implement intelligently
Making changes to benefits programs is serious business. Successful rollout means thinking beyond careful selection of plan features and vendors. Try to build consensus for change by engaging employee leaders throughout the decision-making process and seek their help in communicating changes in a positive fashion.
Because changes in providers and investment lineups often require reenrollment, consider an outreach campaign promoting the benefits of the new design to both participating and nonparticipating employees.
As a leading provider of retirement plans and the second-largest provider of 403(b) plans*, Fidelity is uniquely qualified to guide you and your employees through vendor consolidation and beyond.
In the past two years alone, Fidelity has helped nearly 100 clients successfully navigate the consolidation process. These clients have come to rely on Fidelity’s unparalleled knowledge of 403(b) regulations that keeps them updated on the impact of changes in the regulatory environment. Moreover, plan sponsors are benefiting from Fidelity’s industry-leading fiduciary support services, including detailed investment analysis, fee transparency, and a comprehensive retirement plan review. Plan sponsors selecting Fidelity as their provider are also able to offer their participants full access to Comprehensive Employee Solutions—Fidelity’s guidance program designed to engage participants through life’s many investment stages toward financial wellness and retirement readiness.
Fidelity’s unsurpassed experience in workplace retirement savings plans means you’ll have access to resources and solutions designed to enhance the value of your programs to your organization and your employees. If you’re ready to make a change, Fidelity is ready to help. Contact your Fidelity representative today to discuss your unique needs.
* Not-For-Profit-Market Report, First Quarter 2010, LIMRA International
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