The challenge

A registered investment advisor (RIA) with a sizable book of healthcare institutions was hearing similar complaints from two separate clients. Both were medium-sized organizations with frozen defined benefit pension plans, using different insurance carriers to provide bundled defined benefit actuarial, investment, administration, and benefit paying services.

Healthcare institution “A,” with 2,800 plan participants and $164 million in assets, was experiencing poor administration services, including statements being sent to the wrong participants two years in a row and a mix-up in asset allocation that cost them $180,000. In addition, the administration service team was turning over frequently. Finally, their compensation arrangement with the insurance carrier was structured as a base fee plus basis points on the assets. A reduction in the basis point rate following some of the service issues did little to assuage the feelings of either the chief financial officer or the vice president of human resources (HR).

Healthcare institution “B,” with 1,400 plan participants and $35 million in assets, was also experiencing service deficiencies on the administrative side. However, their greatest concern was the level of the compensation paid to the insurance carrier and the nature of the arrangement, again a mixture of a fee plus basis points on plan assets. While successful in reducing their plan participant counts by freezing the plan and conducting a lump-sum window, their compensation to the carrier was still driven in part by asset size. In addition, the carrier’s investment structure relied on mutual funds rather than a separately managed account (SMA) environment, which has been proven to be more cost effective.

In both cases, there was an overall lack of transparency in the compensation arrangements that was increasingly unacceptable to the organizations.

The solution

The RIA began to analyze the cost and service issues of his two clients, and a common solution became evident. It was to unbundle the respective actuarial, administration, investment, and benefit paying services and find cost competitive “best in class” providers through a competitive bidding process.

Beginning with healthcare institution A, requests for quotations (RFQs) were issued to several prospective providers of actuarial and administrative services, and separately to providers of trust, custody, and payment services. On the investment management expense side, competitive quotes were also received from several providers of SMA investment management services.

Once these quotations were submitted and reviewed, it was apparent that significant overall savings could be attained through the unbundled approach.

Following presentations and participant website demonstrations, Milliman was selected from among the firms competing for plan actuarial and administrative services based on:

• Competitive costs
• Fee transparency using a fully disclosed per head pricing structure
• Website and participant call center technological prowess
• Demonstrated plan consulting skills (an insurance carrier group annuity contract—in effect but unknown to the client—was revealed by Milliman during the discovery process)
• Inclusion into the service contract a tool that daily estimates discount rates, funded status, and various projections and automatically informs the plan sponsor electronically

Shortly after the completion of healthcare institution A’s search, a similar RFQ was initiated for institution B with similar results. Unbundling was again proven to be cost effective for actuarial, administrative, and paying services. And, as before, significant savings were also found by moving the plan assets from a mutual fund environment to one using SMAs. In B’s case, this move will have the added advantage of providing tighter compliance with the plan sponsor’s investment policy statement (IPS) because the RIA now has more plan assets under advisory. Fee transparency was also improved here. Milliman was again selected based on a competitive proposal and presentation by the service team who would actually perform the work. The decision by the committee was consistent with the recommendation of the RIA who performed his due diligence on the proposals.

The outcome

Both healthcare institutions are now in varied stages of conversion to Milliman’s defined benefit administration model. Their Milliman actuarial teams are currently in the process of replicating the prior year’s valuations as one of the key initial steps in assuming responsibilities for the plans.

For healthcare institution A especially, the Milliman platform will allow HR staff to disengage from the prior requirement that they be the point of escalation for retiree- and beneficiary-related problems and issues. In addition, information is flowing smoothly from Milliman to the SMA managers responsible for the liability driven investment (LDI) portion of their portfolio.

Both organizations are experiencing greater fee transparency, expense reduction, and improved service from the move to unbundling.

The RIA serving these two clients now has more latitude and flexibility to employ the tools and techniques he believes will enable them to help his clients reach their financial and HR objectives for these plans.