Cerulli Analyzes Evolving Role of Consultants in DC Marketplace

Eighty percent of investment consultants expect to increase their defined contribution (DC) business in the wake of the pension fund crisis, according to Cerulli’s 2007 survey of investment consultants.

That does not mean consultants are abandoning defined benefit (DB) plans. In fact, 60% of consultants surveyed feel the demise of the defined benefit pension plan has been overstated, and 60% said they are focused on retaining DB clients. But DC plans are increasingly becoming a focal point for consultants, according to The Cerulli Edge: Retirement Edition for 1Q 2008.

Cerulli estimates that between 20% and 25% of corporate DC plans greater than $10 million use an investment consultant, while between 35% and 40% of corporate DB plans greater than $10 million use a consultant, the report said.

More Opportunity

One reason for more opportunity for consultants is the increasing structuring of DC plans to be more similar to DB plans, or “DB-ization.’ The report said DB-ization is “more intelligent investment manager due diligence, more sophisticated asset allocation, and more precise fund selection.’ DB-ization also refers to the paternalistic elements the DC plan is adopting, resulting from the Pension Protection Act and Department of Labor sanctioning auto-enrollment provisions and lifecycle funds as qualified default investment alternatives (QDIA).

Consultants also foresee more opportunities outside of the investment offering. For example, 70% of consultants said they expect increased business related to fee analysis, the report said.

Lost in Translation

While DC plans are undergoing DB-ization, not all DB strategies translate to the DC market. Consultants are an important bridge between DB and DC plans, the report noted.

Alpha/beta separation prevalent in DB plans, for instance, is hard to implement in DC plans. While 130/30 funds provide alpha/beta separation, Cerulli analysts believe the complexity of these funds will limit their widespread adoption in the DC market.

But long/short (such as 130/30) funds have potential coupled with exchange-traded funds (ETFs), which are expected to increase in the make-up of DC plans, the report said. According to Cerulli surveys, 80% of DC providers expect an increase in the usage of ETFs. “The coupling of these two funds within an embedded-advice structure could have the potential to deliver investment returns comparable or superior to mutual fund wrap programs at a decreased cost,’ the report said.

Traditional mutual funds are expected to have the least growth in the make-up of DC plans. Thirty percent of providers surveyed expect mutual funds to decrease.

More information can be found at www.cerulli.com