Most plans are underfunded, and many are cash poor. A significant number—about one third of the market— of DB plans are hard frozen, and most sponsors will eventually terminate those plans.
Plan sponsors face serious financial pressures as a result of these issues. They clearly need help.
That presents an extraordinary opportunity for retirement plan advisers. Those who understand the basics of the key concerns and the potential solutions can create new sources of income. For instance, advisers to DB plans can generate revenue when:
· The DB plan comes in
· The funds roll over to a defined contribution plan or other product at termination
· The DB plan leads to an opportunity with the sponsor’s defined contribution plan
Don’t have DB plan experience? That’s OK. Many of the skills you have as a defined contribution plan adviser can be applied to helping DB plan sponsors.
 Analysis using projections from http://www.dol.gov/ebsa/pdf/2007pensionplanbulletin.pdf, table C14 on p. 39, data from http://www.towerswatson.com/united-states/newsletters/insider/5858; Cerulli 2011 Quantitative report and PBGC’s report, table S-36, http://www.pbgc.gov/Documents/pension-insurance-data-tables-2010.pdf
Here are five steps you can take now to tap into the vast DB marketplace.
1. Learn the basics of what DB sponsors are going through right now. Between funding pressures, the uncertainty of if and when to terminate a frozen plan, de-risking issues and more, plan sponsors face a variety of challenges. Familiarize yourself with their challenges. Resources like these white papers about managing volatility, transferring pension risk and building a termination strategy can help.
2. Tap into financial-related centers of influence to identify prospects. Reach out to your current referral network and also to other professionals who work closely with plan sponsors on the financial side. Examples include accountants, attorneys and commercial bankers. They can serve as excellent referrals to plan sponsors that may have concerns about their DB plans.
3. Target the finance side through the chief financial officer (not human resources). Pension funding is a financial issue—not a human resources issue. Typically, CFOs or controllers are the ones grappling with funding the plan. These professionals know that DB issues can cause unwelcome surprises on balance sheets and income statements—and sometimes trigger unanticipated consequences such as benefit restrictions for employees if funding isn’t adequate.
4. Ask about the DB plan first. Typical advisers focus only on defined contribution plans. Plan sponsors are used to calls from these advisers. Approach a plan sponsor about their DB plan, however, and you’ll instantly set yourself apart. If you request a meeting to discuss their funding concerns (the number one priority for DB plan sponsors), there’s a good chance you’ll get that meeting. And if you prove yourself on the DB side, you have a much better chance of landing the defined contribution plan, as well.
5. Conduct a retirement plan assessment of entire program. Many sponsors haven’t considered what they want to spend to provide an end benefit or what that end benefit should provide. You can add value by helping the sponsor see how both plans can help employees achieve the sponsor’s target income replacement ratio.
A retirement plan assessment can pinpoint the sponsor’s goals for the program, including:
- The desired spending level for the plan and for the retirement program as a whole;
- Accounting considerations, such as tolerance for impacts to the balance sheet and income statement;
- Whether the sponsor requires stability or flexibility with the required plan funding;
- Employee considerations, such as attraction and retention goals; and
- For frozen plans, the most efficient means (balancing timing and cost) to terminate.
Ease their pain
One more tip: helping the sponsor consolidate vendors for both DB and DC plans into a single, streamlined model can improve the efficiency of plan operations and help the sponsor potentially save money. It can also boost the experience and end product for both the sponsor and the participant—while opening up even greater opportunities for you.
The DB plan opportunity is one of the biggest in the retirement marketplace today. And with relatively few advisers focusing on DB plans, the market is wide open. Follow the tips above, and explore the services available through retirement plan service providers to help develop a strategy tailored to each organization’s unique needs and goals.
Gary Burczek, FSA, vice president of business development, defined benefit plans, at The Principal.
Henry E. Tebben, CFA, vice president of business development, defined benefit plans, at The Principal.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.