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Auteur: Quynh Piccioni, Bill McClain
Pressure keeps mounting for defined contribution (DC) plan sponsors to “get it right.” Much more is now at stake as the level of scrutiny, from both outside and within organizations, continues to grow.
Despite the growing importance of DC plans and the substantial challenges to effective management, budget constraints are forcing organizations to do more with less, in terms of personnel to manage their plans and funding to improve benefits. And, just as DC plans have become the dominant retirement vehicle, many participants are discovering that their accumulated savings may be inadequate to provide an affordable retirement at their targeted retirement age.
With both plan sponsors and participants hard pressed to increase contributions, it’s vitally important that DC plans derive the maximum benefit possible from the existing investment. This means that each of the following areas must work in tandem at top efficiency: savings behavior, investment behavior, investment performance, investment structure and diversification, asset preservation, fees and expenses, tax efficiency and spend down. Objective measures of plan effectiveness and skillful intervention are needed to achieve this high level of efficiency. Co-sourcing provides an effective means to meet the higher standards while addressing the organizational risks that DC plans present.
So what does co-sourcing mean? Under the co-sourcing model, the adviser plays an inside role, side by side with the plan sponsor, often acting as an extension of the sponsor’s staff. As insiders, advisers have access to details and background information that allow them to proactively identify problems and risks. In contrast, when the adviser holds a strictly consultative role:
Areas Where Co-Sourcing Has Proven Especially Effective
Including a plan adviser on recurring administrative conference calls, for example, can help ensure that the plan sponsor’s interests are supported. The adviser brings marketplace experience that can help the plan sponsor know when it’s appropriate to “push” its vendor and, just as important, when it’s not. Co-sourcing is also critical when engaging a new provider or updating an existing relationship. For example, small changes to contract documents can significantly affect outcomes in the wake of plan errors or litigation.
Mergers, spin-offs, changes in benefit structure/administrator and turnover in benefits staff are all areas of potential risk. This includes risks associated with administrative or compliance errors as well as suboptimal change implementation. Another possibility is an adverse effect on employee morale and engagement should an error occur or as a result of lack of timely, accurate and accessible communication around the change.
Major changes can place considerable strain on in-house staff. An outside adviser’s ability to quickly provide resources can be critical to successful change outcomes. This is especially true when the adviser has an existing co-sourcing role and is already familiar with organizational structures, benefit structures and service providers.
We find that turnover in staff often happens concurrently. Should that occur, the adviser may be the only remaining party with in-depth institutional knowledge and background. This knowledge becomes extremely valuable, both in bringing incoming staff up to speed and in dealing with questions or benefit claims that relate to past administration.
A potential barrier to co-sourcing is the cost of hiring an outside adviser. For this reason, it’s important to adopt a flexible co-sourcing model that fits the organization’s need. It’s also useful to evaluate the cost of bringing an adviser on board compared with the expense of hiring additional staff, including recruitment, training and turnover. This evaluation should also take into account potential costs associated with various risk outcomes, such as correction of errors (both direct expenses and staff time), audit sanctions, litigation and intangible costs, such as employee engagement, reputational risks and the effect on external customers.
In an effort to reduce expenses, many organizations reduced their internal staff headcounts during the economic downturn. In this type of environment, co-sourcing often makes sense, as it can help reduce risk while maintaining a lean staffing model. The following chart illustrates how this model allows an organization to increase resources at critical junctures, as compared with constantly maintaining a higher staff level.
Co-sourcing Can Provide Increased Capacity and Capability at Key Times During the Year
As mentioned above, it’s important to adopt a co-sourcing model that matches organizational needs and preferences – co-sourcing is not an all-or-nothing decision. The sample plan management strategy chart, below, illustrates the options available to plan sponsors and fiduciaries in structuring service levels to best meet their needs.
Clearly, DC plans have risen dramatically in their importance, both to the organizations that sponsor them and to the individuals whose financial future depends on their success. The days when organizations could get by with less-than-optimal management and mediocre performance are gone. Delivering optimal outcomes in the midst of economic, marketplace and organizational change requires a true partnership with those who have specific expertise. The ultimate outcome is reduced risk for the organization and, more important, improved benefit delivery to DC plan participants.
2 Mercer’s 2011 What’s Working™ survey results
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DC Plan Management: Co-Sourcing Trends
ABOUT THE AUTHORS
+1 213 346 2273
Quynh Piccioni is a Principal in Mercer’s Retirement, Risk & Finance business in the Los Angeles office. She has more than 25 years of experience in consulting with clients on all aspects of DC plans. She is a national Mercer resource for plan implementation/plan integration and plan management. Quynh’s recent projects have included co-sourcing and consulting for ongoing plan management, including overseeing plan governance and committee meetings, fee reviews and negotiations, compliance and vendor reviews. Quynh holds a bachelor’s degree from the University of Southern California.
Bill McClain ASA
+1 206 214 3627
Bill McClain is a Principal in Mercer’s Retirement, Risk & Finance business in the Seattle office. He has 22 years of experience in the retirement benefits field, specializing in the design, governance, compliance and administration of DC plans. Bill is also Mercer’s US Intellectual Capital Leader for DC plans. He has spoken at conferences locally and nationally and has published numerous articles on DC plan issues for national journals. Furthermore, he is a board member of the Western Pension and Benefits Conference. Bill received a bachelor’s degree in mathematics and a Master of Education in mathematics, both from the University of Washington.