Bringing it All Together

Generally speaking, total retirement outsourcing (TRO) refers to the farming out of all administrative functions associated with a company’s multiple retirement plans—defined contribution (DC), defined benefit (DB) and nonqualified.

Outsourcing plan administration is nothing new, but, as the recordkeeper marketplace evolves, more providers are gaining the expertise to administer multiple plan types—meaning advisers can help plan sponsors find one provider for their DB, DC and, sometimes, nonqualified deferred compensation (NQDC) plans.

If an adviser has worked with a client on one plan, moving to TRO can give him the benefit of overseeing more plan assets under administration (AUA).

Advantages for plan sponsors are substantial, too, says Stephanie Sorenson, a Milliman benefits analyst in Seattle. These include time saved for benefits staff; a single transmission of census data for both 401(k) and defined benefit plans, and, with that, greater visibility of the value of benefits to employees; better access to advanced benefits management technology without direct capital investment; a single point of contact for the vendor relationship; and, finally, a combined nondiscrimination testing environment. Assuming the price is right, it can be an appealing picture for resource-strapped sponsors and human resource (HR) committees.

In the past, bundled administration arrangements may have operated three separate platforms, one each for DB, DC and NQDC, all under one brand heading. Service from the provider was, perhaps, coordinated by a single account representative or a small team, but the real legwork of running the various plans was not truly unified.

Yet, years of competition and technological development have honed and strengthened the TRO marketplace, while also driving down costs, experts say. Against this backdrop, advisers may want to consider how their own expertise in coordinating the various moving pieces in TRO can complement their more traditional DC business.

Helping a plan sponsor find a single recordkeeper or administrator for all of its plans does not always mean the adviser must become an expert in all plan types, either. Advisers who have traditionally worked on defined contribution plans will find that many needs of pension plans do not necessarily require the adviser to be a DB specialist; instead, he can quarterback a solution by bringing the pertinent experts together, says Marty Menin, director of retirement solutions at Pacific Life in Denver. A similar approach can be taken for NQDC plans.

TRO Shines Amid Program Complexity
Sorenson explains the benefits of the TRO approach by walking through a case study the firm is particularly proud of. Back in 2011, she says, Milliman was contracted by a Pacific Northwest company to administer its hourly and salaried pension plans. These plans had been in place for more than 50 years and had always been administered in-house.

Although the plan sponsor had been reluctant to outsource, data issues were hampering the pension administration, stemming from multiple HR/payroll system upgrades that had led to historical data being housed in four different databases, she says.

In addition, retiree data was not current on the company’s systems, and the vested benefits of past terminations were unreliable, Sorenson notes. “As a result, participants experienced a six- to nine-week turnaround for estimate and retirement requests. The unreliable data also ruled out any opportunity for the use of online calculator tools.”

Asked to address these challenges, Milliman suggested a phased implementation—a strategy that advisers may view as ripe territory for collaboration with the plan provider. It resulted in a unified retirement planning environment where participants had efficient, accurate and complete access to their plan information across all DB, DC and NQDC plans, Sorenson concludes. Such an environment allows the adviser, plan sponsor and participants to have more fruitful conversations, centered on goal setting and unique individual challenges. The idea is that the benefits of retirement readiness metrics or planning discussions can be far more valuable when the parties have more—and more accurate—information from one provider.

TRO and PRT
The defined benefit market for pension risk transfer continues to grow—having topped $1 billion per quarter in recent years, according to the LIMRA Secure Retirement Institute. Wayne Daniel, senior vice president and head of MetLife’s U.S. pensions business in New York City, says one powerful service that advisers can provide for TRO clients with one or more bundled pensions involves analyzing and monitoring the pension risk transfer (PRT) environment—offering a third-party perspective that both the plan provider and plan sponsor can use in their administration decisions. 

Understanding and defining the PRT break-even point is a task that will be challenging for non-financial professionals—i.e., most plan sponsors. As Daniel points out, there are a number of explicit and implicit costs and benefits to be weighed in PRT decisions. “Depending on the approach used, these costs and benefits may vary widely. For annuitization, they may entail the differences among the plan’s current funded status, existing assets and the amount required to settle all or a portion of the liability,” he says. “For sponsors used to viewing the accounting liabilities as the ‘true’ measure of the liability, rather than as a current ‘snapshot,’ an insurer’s estimate of the actual cost to transfer the liability permanently is different.”

TRO Increasingly Involves NQDC
As the 2015 PLANSPONSOR Nonqualified Deferred Compensation (NQDC) Buyer’s Guide—our latest—shows, a sizable portion of this marketplace has moved down the road of bundling NQDC and qualified defined contribution plans together. The research shows nearly a quarter (23%) of employers with an NQDC plan utilize the same provider for their DC plan administration, while 6% have bundled a defined benefit plan with their DC and NQDC arrangements. An additional 10% identify using “other NQDC bundles”— for example coupling their DC plan benefits with long-term executive incentive programs.

Advisers will find multiple opportunities in the NQDC plan arena. Consider that more than half (57%) of the plan sponsors surveyed for the Plan Sponsor Council of America (PSCA) 2016 Non-Qualified Deferred Compensation Plan Survey offer the same menu in these plans as in their qualified defined contribution plans. If advisers already provide expertise on these investments in the DC plan and know such options are available on the NQDC plan platform, TRO can be an easier conversation, experts say (see “Expanding Savings Options,” PLANADVISER May/June 2017).

According to the PLANSPONSOR NQDC Buyer’s Guide results, although employees eligible for these plans are often well-compensated, they may not understand the need to have supplemental retirement savings outside of their qualified plans. This can be where the adviser adds value to the plan sponsor by supporting it with robust advice and education.

Education in this context begins by helping eligible employees understand the value of the NQDC plans available to them. Advisers might then move on to work with executives to help them understand how they can use such a plan to prepare for near-term and long-term objectives, such as putting money aside for college tuition or paying off a mortgage—not just for retirement, says Dan Barry, senior vice president with Lockton Executive Benefits in Charlotte, North Carolina.

Key Takeaways

• TRO outsourcing can offer many benefits to plan sponsors, including combined data on participants in their defined contribution and defined benefit plans, a combined nondiscrimination testing environment and a greater visibility of the value of benefits to employees.
  
  
• When helping advise a DB plan, advisers can help sponsors determine the break-even point of a pension risk transfer transaction.
  
  
• Advisers can increase their assets under advisement and enhance their relationship with plan sponsor clients by helping to quarterback the work across the TRO platforms and among the providers involved with the various plans.