Keeping Up With All the Players in Outsourced Benefits Administration

Andy Adams and Jay Schmitt, with Strategic Benefits Advisors, discuss what plan sponsors should consider in a changing benefits outsourcing market.

The last few years have been a time of upheaval in the benefits outsourcing market—so much so that it’s hard for plan sponsors to know what they should be looking for and who to consider when preparing requests for proposals (RFPs) for the outsourcing of their defined benefit (DB), defined contribution (DC), health and welfare, and nonqualified benefits.

The major players are changing

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In the last two years alone, we’ve seen a large consulting firm divest its outsourcing division and another global services company spin off its outsourcing arm from its other, unrelated lines of business. Big players that previously exited the space have returned with great fanfare, only to exit again. Some vendors have turned to offshoring or near-shoring as a way to manage cost, while others are bringing operations back in-house after less than satisfactory forays into offshoring.

On the flip side, at least one major outsourcing provider is running hard at the market again after a long period of dormancy, and we’re even seeing new entrants to the benefits outsourcing arena, some of whom are garnering rave reviews from early adopters. It’s always been hard for plan sponsors to give equal consideration to boutique providers, and keeping an ear to the ground to learn about excellent providers that are relative unknowns is even harder in today’s fast-changing competitive landscape.

Divestitures and acquisitions can be extremely disruptive to outsourcing clients. These upheavals often trigger major migrations of account managers and other trusted partners, which in turn can have a negative impact on the level of service plan sponsors receive. More and more companies are considering changes to their lineup of benefits administration providers, and they’re finding it’s a full-time job to keep up with everyone who should be included in an RFP.

Plan sponsors’ tech needs have evolved, too

The technology requirements of plan sponsors are also rapidly changing, and as a result, today’s benefit administration RFP looks quite different than it might have just five years ago. Here are just a few areas where plan sponsors are rewriting their requirements lists:

  • Proprietary vs. off-the-shelf core administration systems. Does the outsourced administrator rely on proprietary technology or an off-the-shelf solution, and how does this choice affect the cost and speed with which the administrator can roll out changes when requested or required? Both system approaches have their advantages and disadvantages.
  • Reporting. Are the administrator’s reporting capabilities sufficiently advanced to meet the plan sponsor’s specific needs, such as allocating expenses across multiple business units and/or locations?
  • Decision support tools. Does the administrator offer decision support tools that meet participant expectations for a modern, mobile-friendly user experience? This may include the use of artificial intelligence (AI) to help plan participants make better selections and help employers control costs.
  • Security. Is the administrator up to date on the latest information security protocols, including multi-factor authentication, that are necessary to stay ahead of criminals? Contract language has also significantly evolved to address new concerns in the area of security.
  • Participant experience. Rapid technological advances, including AI, are improving how participants access information and upload required documents. Some vendors are even expanding their use of AI to help employees easily navigate all human resource (HR) functions including recruiting, onboarding, payroll and benefits.

Running an RFP process and interpreting the results is a challenging task that has become even more challenging in recent years. When companies are struggling with their benefits outsourcing provider, we recommend they consider the vendor recovery approach before commencing a search for a new partner. If the relationship cannot be salvaged and an RFP is necessary, it can be beneficial to enlist the help of an expert that knows all the players in the space and understands what should be required of a benefits administration vendor today.

Andy Adams and Jay Schmitt, an associate of the Society of Actuaries (ASA), are principals of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm focused on solving complex benefits issues for clients employing 500 to over 300,000 workers. Andy and Jay have more than 55 years’ combined experience in benefit plan administration and consulting. They can be reached at info@sba-inc.com.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services (ISS) Inc. or its affiliates.

Lawsuit Over TDFs Names Provider as Defendant

Participants in the CHS/Community Health Systems, Inc. Retirement Savings Plan have filed a lawsuit against the company, its retirement plan committee and the provider of target-date funds (TDFs) in the plan for maintaining excessively expensive and poorly performing underlying investments.

Participants in the CHS/Community Health Systems, Inc. Retirement Savings Plan have filed a lawsuit against the company, its retirement plan committee, Principal Life Insurance Company, Principal Management Corporation and Principal Global Investors, LLC accusing them of breaching their fiduciary duties through their disloyal and imprudent management of the plan and its investments.

The plaintiffs are asking to recover the losses caused by the defendants’ fiduciary breaches, disgorge the profits earned by Principal as a result of these breaches, prevent further mismanagement of the plan and its investments, and obtain equitable and other relief as provided by the Employee Retirement Income Security Act (ERISA).

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In a statement to PLANSPONSOR, Principal said: “On August 8, 2019, a lawsuit was filed in the U.S. District Court for the Middle District of Tennessee naming Principal Life Insurance Company, Principal Management Corporation, and Principal Global Investors, LLC as defendants. The lawsuit is related to management of the Community Health Systems, Inc. (CHS) Retirement Plan’s investments. We disagree with the allegations in this lawsuit and will vigorously contest them. Principal is one of many companies in the industry that have had lawsuits filed against them making these kinds of claims.”

Specifically, the complaint says the CHS defendants breached their fiduciary duties by maintaining excessively expensive and poorly performing index funds in the plan that were managed by Principal.

According to the complaint, the marketplace for index funds is highly competitive, with several companies offering index fund products that track benchmark indices with a high degree of precision, while charging very low fees. It alleges the CHS defendants did not give any serious consideration to these competitive index fund offerings in the marketplace, and, instead, used Principal’s proprietary index funds, despite fees that were several times higher than marketplace alternatives that tracked the exact same index.

In addition, the plaintiffs say, not only were the Principal index funds far more expensive, they were also of significantly lower quality. Compared to marketplace alternatives, Principal’s index funds deviated further from the benchmark index, and consistently had the worst performance even on a pre-fee basis. “Given the high fees and history of poor performance of Principal’s index funds, a prudent fiduciary acting in the best interests of the plan’s participants would have removed these index funds from the plan and replaced them with more competitive marketplace alternatives,” the complaint says. “The CHS Defendants’ failure to do so has cost participants millions of dollars in excessive fees and lost investment returns.”

In addition, the plaintiffs are charging the CHS defendants with failing to properly monitor Principal, and failing to appropriately address its conflicts of interest in managing the plan’s target-date funds (TDFs).

According to the complaint, because these TDFs are organized as separate accounts for the plan, Principal owes fiduciary duties to the plan and its participants with respect to the management of those accounts. However, it alleges that contrary to its fiduciary duties, Principal engaged in self-serving conduct that harmed plan participants, and the CHS defendants have failed to address these fiduciary breaches or take any remedial action.

In managing the TDF separate account portfolios, Principal selected and retained its own proprietary funds as underlying investments, including high-cost Principal index funds, the complaint says. In addition, it alleges Principal retained higher-fee versions of other underlying proprietary investments in the TDF separate accounts to increase its own fee revenue, at the expense of plan participants. For example, as of 2017, the lowest-cost share class for Principal’s mutual funds are R6 shares. Yet, Principal consistently used Institutional shares for the mutual funds held by the TDF separate accounts despite the availability of less expensive R6 shares. As another example, Principal utilized the mutual fund version of the MidCap Growth III, SmallCap Value II, and SmallCap Growth I funds as underlying investments in the TDF separate accounts, even though identical annuity subaccount versions of these funds were available with fees that were 20% to 30% lower. In yet another instance, Principal used the mutual fund version of the Diversified Real Asset fund, even though a collective investment trust (CIT) version of this fund with lower fees was available, and was used by Principal as an underlying investment in other target-date products it managed.

The plaintiffs contend that given Principal’s conflicts of interest, the CHS defendants should have closely scrutinized Principal’s choice of investments for the TDF separate accounts and its management of those accounts. Moreover, the CHS defendants should have been especially cognizant of the problems associated with the Principal index funds in the TDF separate accounts, given that the CHS defendants included those index funds as standalone funds in the plan. “Yet, the CHS Defendants took no action to address Principal’s mismanagement of the TDF separate accounts and left those separate accounts undisturbed in the plan. This was imprudent and improperly placed Principal’s interests ahead of plan participants,” the complaint says.

Based on this conduct, the plaintiffs assert a claim against all defendants for breach of their fiduciary duties of loyalty and prudence (Count 1), and assert a claim against the CHS defendants for failing to properly monitor other fiduciaries (Count 2).

Recently, a lawsuit was filed alleging fiduciaries of the Walgreen Profit-Sharing Retirement Plan selected and kept TDFs in the plan that underperformed their benchmarks. And, retirement plan fiduciaries at Intel were accused of failing to properly monitor and evaluate “unconventional, high-risk allocation models” adopted within the company’s custom TDFs.

These lawsuits target the actions a litigation firm has listed that it is investigating for potential lawsuits over TDFs in retirement plans.

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