Robust selection: outsource tech or improve

Last year, it was Vanguard Group Inc.

Last month, it was T. Rowe Price Group Inc.

When it comes to big record keepers outsourcing technology management, defined contribution consultants, industry members and researchers won’t speculate on the next candidate, but they agree record keepers are being forced to make decisions based on the need and cost of upgrading their technology.

“It makes perfect sense because organizations are looking at significant investments in technology,” said Lew Minsky, the Palm Beach Gardens, Fla.-based president and CEO of the Defined Contribution Institutional Investment Association. “Everybody has the same set of considerations.”

Some giant record keepers will fortify their existing technology; some will outsource. Some companies will sell their record-keeping business, deciding that the cost of upgrading is too great in an industry characterized by continuous profit-margin pressures.

“Record keeping has always been a technology-heavy business,” said Ross Bremen, a partner at consultant NEPC LLC, Boston.

“They always have to make substantial investments in their technology,” Mr. Bremen said, noting that rising costs reflect the evolution of technology from mainframes to servers to cloud computing. “The world is becoming more ‘I want it in the next five minutes’ rather than how it used to be.”

The cost of technology is only part of record keepers’ calculations for sustaining profitability.

Sponsors continue to demand lower fees. Litigation risk and plan design changes mean traditional income sources may not be as plentiful for record keepers as in the past, such as offering proprietary investments or revenue-sharing to sponsors.

“Because of open architecture, there’s a lot more pressure to offer solutions without (offering) proprietary assets,” Mr. Bremen said.

“If they don’t have the opportunity to earn revenue from their proprietary products, they have to find other sources of revenue,” he said.

Otherwise, they “have to go in another direction,” which means reducing their costs without reducing their services to the ever-increasing demands from sponsors, he said.

The need for greater investments in technology influences companies considering the sale of their record-keeping business.

Although a seller’s formal news release often says the sale was done because record keeping was no longer a strategic fit, technology plays “a much larger role” than the official announcements describe, said Leslie Smith, a Somerset, N.J.-based partner for Aon PLC.

“There needs to be a large commitment” to spending on technology upgrades, Ms. Smith said. If record keeping isn’t a core business to a company, the expense plus the general pressures of record keeping will convince them to sell, she added.

Technology has been a “behind-the-scenes” contributor to companies selling record-keeping businesses, said Amy Reynolds, a Richmond, Va.-based partner for Mercer LLC. “Providers need to be more nimble,” Ms. Reynolds said. “Some of the legacy (technology) processes are slower and aren’t as nimble,” creating a dilemma for companies that realize they must invest more to compete and provide additional services.

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