PANC 2014: Advisers and Defined Benefit Plans

The retirement planning industry has long been characterized by a shift from defined benefit (DB) to defined contribution (DC) plans, but advisers still face great opportunity in serving DB clients.

Industry experts speaking on the “Defined Benefit Plans” panel presented on the second day of the 2014 PLANADVISER National Conference suggested many of the same skills are needed to serve DB plans as those required to serve DC clients. Panelist Cathy Berg, vice president of defined benefit business development for Transamerica Retirement Solutions, said there may even be less competition in pursuing new DB business compared with DC opportunities.

“When you’re out there and competing strongly in the DB space, it’s a fraction of the competition that you’ll likely be facing in serving the DC plans,” Berg explained. “You don’t have to be an actuary to be an adviser to a pension fund. You have value to add on things like the investment reviews, and there are a whole host of fiduciary services the adviser can provide to DB plan sponsors. The terminology might be different on the DB side, but it’s actually very similar work in a lot of respects.”

Like plan sponsors helping plan participants invest for retirement through DC plans, sponsors of pension funds are seeking ways to bring more certainty and lower costs to their plan operations. This is largely a result of dramatic swings in funded status experienced by many pension funds in recent years, Berg said, adding that pension plans, like many individual and institutional investors, fell into a dark hole during the most recent financial crisis.

“We all know that the funded status of U.S. pension plans is jumping all over. With higher levels of volatility you can swing from well-funded to stressed very quickly,” Berg said. “It has truly been a roller coaster in recent years, and DB plan sponsors are desperate for more control, so that’s a big driver of opportunity for advisers.”

Panelists suggested advisers can work as if they are a quarterback on behalf of plan sponsors, helping to implement liability-driven investing (LDI) strategies or other steps on the oft-lengthy pathway to termination. Bruce Lanser, a panelist serving as an institutional consultant at UBS Financial Services, added that advisers can pursue DB business in a variety of ways—whether by prospecting new clients or leveraging existing DC relationships where there may be a DB plan present that is not yet served by the adviser.

“The common theme in the corporate plan world is, for the most part, how can I get myself out of the pension business?” Lanser said. “Administration costs are rising even among frozen plans, and so DB sponsors are seeing less and less return, so to speak, on their DB offerings. They aren’t able to use the plan to attract new employees, and the benefits are increasingly going to people who don’t work at the company anymore.”

Lanser said increasing Pension Benefit Guaranty Corporation (PBGC) premiums, both for fixed- and variable-rate coverage, are scheduled to grow substantially in the next few years. New longevity tables pending from the Society of Actuaries could also send average pension accounting liabilities up 4% to 10%, depending on plan demographics.

“These factors have done even more to change the mindset of pension plan sponsors and push them towards freezing and termination,” Lanser said.  

Panelist Lynn Esenwine, distribution vice president at Prudential Retirement, suggested that one specific area advisers can bring value to pension plan clients is in assessing the various outsourcing or partial termination options facing frozen DBs.

“In the pension world we are seeing a lot of attention being paid to the concept of total retirement outsourcing [TRO],” Esenwine said. “The adviser is in a great position to step between the TRO provider and the sponsor and ask, does making a conversion to a TRO provider really give you the solution you need? This is a question advisers can look at, helping the sponsor determine what will be the most cost-effective solution, whether that’s TRO or not. Advisers can guide the sponsors through this process—and it’s really big value add.”

Advisers should note that this type of a conversation usually occurs at the “c-suite” level, Esenwine added. “This is the type of advice and guidance that’s going to get you meetings with the treasury office and the top executive’s office,” she said. “This in turn helps the adviser build credibility and really establish a quality relationship at the company.”

Lanser said there is also a tremendous opportunity in the areas of outsourced chief investment officer (OCIO) mandates, as well as in 3(38) fiduciary investment manager mandates. These types of arrangements give advisers discretion over pension fund investments and manager-related decisions while allowing executives and HR staff to focus on their duties beyond the retirement plan—which tend to be expansive.

What's more, trusted advisers serving a client’s DB and DC needs are often turned to for other types of wealth management services sought by highly paid executives, Esenwine said. And besides, “If you’re not talking to your plan sponsors about the pension plans they may also be serving, someone else will be.”

While the opportunities to serve DB plans in new and creative ways are expansive, none of the panelists said it would be easy to actually win such opportunities. Lanser warned advisers that it’s easy to get pigeonholed as a strictly DC expert.

“Interestingly, it can be challenging even for a trusted DC adviser to earn confidence on the DB side,” Lanser said.  “Clients will want the same level of expertise on the DB side, and it's easy to see an adviser being restricted to that DC persona. So starting early and often on the DB conversations is important. You have to know the language and the lingo and be able to demonstrate the capabilities to the clients.”