Corporate America is wedded to efficiency. With the go-go ’90s far behind us, companies are looking almost everywhere to cut costs. One way to do that, argues New York Life Investment Management Retirement Plan Services (NYLIM RPS), is for companies to use one provider for both their defined contribution plans and their defined benefit plans. Moreover, NYLIM says, many companies are opting for a bundled model in which one provider delivers a turnkey approach that integrates all the traditional pension services into one.
The pros responsible for sales and marketing at NYLIM RPS–Donald Salama and Gary Jackson–recently stopped by the IA offices for a chat with Editor Jamie Green.
Please talk about your backgrounds. Donald Salama: I started out at Banker’s Trust in the 1980s. At that time I would read Pensions & Investments every week and not see one word about 401(k) or other defined contribution plans, and I wondered “When are they going to talk about the stuff I do?”
Barry Schub, who runs NYLIM RPS, and I were both at Banker’s Trust then, and it was interesting to watch the bundled phenomenon happen. We were doing recordkeeping and were trying to cross-sell investment management to our clients, but it wasn’t successful. Then in 1988-89, Fidelity started to offer a package, and people said, “I’ll buy their recordkeeping services along with Fidelity Magellan and some other funds,” and all of a sudden we started to lose some business. By the early ’90s we started to lose a lot more business, and you could start to see the bundled trend happen.
The same thing that happened to defined contribution plans 15 years ago [will] happen to defined benefits now.
Gary Jackson: I started out in the retail end of the business, back in the late ’70s. I went to Japan [in the 1990s] for two years to set up Citigroup’s defined contribution efforts there, just as the government was on the cusp of passing its DC legislation. Five years ago, before I went to Japan, I told my people in the field, this is where it’s going, DB and DC. Plan sponsors want to talk to fewer people, not more people.
Let’s talk about the business. New York Life’s got about 600 401(k) plans? Salama: We do distribute a small 401(k) product but only through our New York Life agency system. We have about 350 mid-market plans that are typically $15 million in size. All of our distribution through outside financial advisors is in that midsize- and large-plan market. That’s a specialized niche, since only one in a hundred financial advisors knows how to sell to a corporation of that size.
Jackson: That’s where we’re seeing a lot of activity, because the compression in those companies’ businesses has forced them to be much more inquisitive about bundling. That’s also where the intermediaries, that 1%, tend to play.
What’s your approach? Salama: Starting about six years ago, we were one of the pioneers of a truly bundled product–taking the investment advisory piece, either separate account or mutual fund management, then adding actuarial services and administration.
Jackson: We typically provide 30%-40% [savings] in a bundled package over the same corporation buying those components separately from different providers.
Salama: People think the traditional pension plan is going away, and there has been a decline in the number of plans. In 1998 there were 58,000 plans; now there are about 42,000. But the number of employees covered by those plans is almost the same as it was in 1998, a result of merger and acquisition activity. There’s about $1.9 trillion in corporate defined benefit pension plans. That’s still a huge number, though granted, it is now smaller than the DC world. Less than 5% of that $1.9 trillion is in a bundled structure, so that’s 95% of the corporate DB world that could save 30%-40%.
At the end of 2000, 60% of companies had to make a contribution to their pension plans in what wasn’t a bad financial year. What a great time for [an advisor to have] a discussion with a CFO when the company’s contribution to the pension plan could be bigger than the profitability of the company. That’s how big these liabilities can be.
Editor Jamie Green can be reached at firstname.lastname@example.org.