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.
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