Consultant Choice Affects Investment Strategy at DC Plans

A study affirms the idea that defined contribution (DC) plans could end up with differing plan design features and results depending on the choice of service providers such as recordkeepers or investment consultants.
A news release about a study of large U.S. DC plans by London-based PensionDCisions, a DC plan consultant, said selection of a recordkeeper is an important factor in a plan’s use of an investment manager, while the selection of an investment consultant is an important factor in determining the use of active management strategies and customized investment solutions.

The study also found that 72% of responding plans use an off-the-shelf target-date fund and that in about half of those cases, the fund is selected from the same entity as the recordkeeper.  Also, 13% of plans use a customized solution, and for many of those, there is a lack of transparency regarding the underlying product composition and performance.

Plans using a customized default solution have, on average, $2.3 billion in assets, while plans using off-the-shelf default solutions have on average $2.2 billion in assets, the survey found.

According to the study, a small group of providers holds the lion’s share of relationships in the categories of investment consulting, recordkeeping, and investment management.  Four investment consulting firms account for 58% of mandates, three recordkeeping firms account for 67% of mandates, and two investment managers account for 55% of mandates.

PensionDCisions said its study indicated that it’s difficult for plan sponsors to recognize whether greater complexity and higher fees represent an investment worth making in order to improve outcomes for participants.”It is possible that these solutions might deliver superior value over time, but factual evidence is lacking,” the study release noted.

The firm also said that despite "huge" amounts of investment performance data, there is no efficient mechanism enabling plans to calibrate their design decisions.  “By benchmarking risk-adjusted net returns actually delivered to plan participants there is an opportunity to help sponsors, providers, and advisers better understand how different approaches to plan design and advice impact participant outcomes,” the firm said.

“The decisionmaking process for plan sponsors and participants is becoming more complex, making it more difficult to connect with the most appropriate solution,” said Graham Mannion, managing director of PensionDCisions, in the release. “Rigorous insight into the risk adjusted performance actually delivered to end consumers will enable all parties to make better decisions”.

The 2010 U.S. Sponsor Survey analyzed default design and plan characteristics across 65 large U.S. DC plans. Collectively the 65 plans represent 1.7 million active participants and $163 billion in assets. Two-thirds of the plans are sponsored by corporations in the Fortune 500.

A copy of the report can be requested at