It turns out defined contribution plan sponsors would rather fight than switch their plan providers. Even the looming new federal rules on fees are unlikely to change this attitude, experts say.
After all, why bother? “Everything vendors do is basically the same,” scoffs Robert Liberto, a senior vice president at the consulting firm Segal Rogerscasey. “Administration is more of a commodity today; they’re all offering these great products on their websites, where participants can do asset allocation modeling themselves.” As for bragging rights about proprietary funds’ investment returns, Liberto points out that the big firms generally offer open architecture, giving employees access to each other’s funds.
Furthermore, switching vendors is a bureaucratic nightmare. The entire company payroll system would probably have to be redone and the workforce would need reams of new brochures and months of meetings.
Indeed, the newest annual survey by Chatham Partners, a market research firm based in Waltham, Mass., found that vendor loyalty actually jumped significantly last year among plan sponsors. According to the firm’s proprietary algorithm — which measures attributes like personnel, participant services and administrative help — the share of “loyal” clients rose 6 percentage points to 58 percent versus a 4 percentage point drop in “at-risk” clients to 16 percent.
Peter Starr, Chatham’s chief executive, says increased focus on customer service is the most important reason. “It’s up to them [vendors] to make sure the plan is running smoothly, all the filings are filed on time, contributions are invested on time, participant statements go out on time,” he says. And both Fidelity Investments and Vanguard Group, the two biggest defined contribution service providers, say their clients have been steadfast. Customer satisfaction at Fidelity has been rising since 2009, as measured by an annual survey asking respondents to rate the quality of service, whether they would recommend the firm and similar topics. Among Vanguard’s 1,700 recordkeeping clients, defections occur only “a couple of times a year,” according to Scott Conking, head of client services at the institutional investor group.
Logic might dictate that such loyalty will erode after August 30, when new Department of Labor rules on disclosure take effect. At that point, retirement plan service providers must give their clients detailed information about “any fees and expenses for general plan administrative services,” additional fees directly charged to individuals and investment performance data, including 1-, 5-, and 10-year returns.
Once plan sponsors see how much they’re paying, they would presumably demand discounts or move to less costly competitors. Indeed, Segal’s Liberto says that because of the new rules, his firm will do a comparative fee analysis for clients every three years. And in September, Chatham will begin a study of the impact of the rules.
But the impact may be underwhelming. The industry has been preparing for this disclosure for several years; the hard bargaining has already been done, and plan sponsors have established a new baseline with their providers, experts say.
Robyn Credico, director of defined contribution consulting at the consulting firm Towers Watson, says fees have come down as much as 20 percent, while Liberto has seen smaller drops of around 25 basis points. “Our existing client base is making sure they are receiving the best possible price they can receive,” says Margaret McKenna, executive vice president for relationship management at Fidelity’s workplace investing division.
Still, McKenna and her colleagues can hardly relax. Other trend lines are more negative. SPARK, the trade association for recordkeepers, says that turnover was 7.8 percent last year, the highest in four years.
Mergers, corporate restructurings and personnel changes — on both sides — are seen as the main reasons sponsors contemplate a switch. Credico says another factor in recent years has been plan redesigns and dumping of defined benefits. Even the Chatham survey warns of declining satisfaction with providers’ ability to offer “creative and innovative solutions” or to help participants reach their goals.
Fees, in any case, are not the most important consideration, “Sponsors are also asking, ‘Is there more to the service package than price?’” says Vanguard’s Conking.