Plan Sponsors Binging on Bundling: Chatham Study

The new report from Newton, Massachusetts-based Chatham Partners, notes that since its 2001 study on bundled DB and total retirement outsourcing solutions (TRO), demand has not only increased, but also moved up-market to larger plans, specifically those with more than $500 million in assets.

According to Chatham, nearly 40% of the country’s defined benefit plans with assets of $1-10 million already utilize bundled DB or TRO solutions. For plans with assets of $10 – $200 million, the percentage is nearly 30% and for plans over $200 million, 25% have a bundled DB or TRO solution.

In a recent study of some 307 plan sponsors by PLANSPONSOR and MassMutual Retirement Services, the vast majority of survey respondents (86.6%) do not currently have a TRO arrangement, and most of those (81.5%) said their organization hasn’t even considered TRO – at least not yet (see TRO Brings Unexpected Benefits ). Still, Chatham projects that the continued growth in bundling will put into play a total of $473 billion in assets across more than 1,900 plans by the end of 2004, creating a revenue opportunity for bundled providers of nearly $2 billion.

Pressures “Cooking”

“Cost-cutting pressures are forcing plan sponsors to seek lower cost alternatives for administering their retirement plans, and corporate downsizing is driving the outsourcing of non-core functions,” said Jaime Hobbeheydar, Managing Director of Chatham Partners. “Additionally, severe funding concerns for DB plans and fiduciary liability for DC plans are causing more organizations to consider semi and fully bundled solutions.”

In view of that potential, it is not surprising that Chatham notes that competition among providers of bundled DB and TRO solutions is increasing as more firms enter the market – seeking both to increase their revenues, as well as to protect their existing relationships.

In 2001, Chatham Partners conducted a study that identified a trend among plan sponsors to purchase multiple defined benefit services (e.g. investment management, recordkeeping, trustee / custodial services, actuarial services, consulting) from a single provider or a formal alliance of providers. That study projected considerable growth in bundling across all plan size segments, with the greatest potential for growth in bundling in the small market plans.

The 113-page Chatham study, “The Trend Toward Bundling of Defined Benefit Services and Total Retirement Outsourcing: Implications for Service Providers,” is based on in-depth telephone interviews with a nationally representative sample of 475 DB plan sponsors and 14 leading service providers.

Chatham Partners provides strategic advisory services and market research to the financial services industry.