“It's an understandable trend,” said Sue Walton, Chicago-based director in the defined contribution consulting group at Towers Watson & Co. “It's not surprising we have kind of crossed that threshold with regard to defined contribution assets” exceeding defined benefit assets.
Among public retirement plans in the top 200 ranking, defined benefit assets still outpace defined contribution assets by a wide margin, $3.204 trillion to $189.7 billion.
“It's not even close in the public sector,” said Cathie Eitelberg, Chicago-based senior vice president and national public sector market director, The Segal Group.
But “there have been redesigns in the public-sector area that have created hybrid plans, which have defined contribution components to them,” Ms. Eitelberg said. “So it's likely that defined contribution assets will grow at a greater rate in the public-sector arena (than they have been), but still nowhere in the neighborhood of defined benefit assets.”
Of the 78 public sponsors in the top 200, 37 offer both defined benefit and defined contribution plans, while 35 offer only defined benefit plans and six offer only defined contribution plans.
“The important thing to note is defined benefit plans continue to be the basic platform on which retirement benefits are built in the public sector,” Ms. Eitelberg said.
On the corporate side, defined benefit plans are fading, both among larger or smaller companies, said Stewart Lawrence, New York-based senior vice president and national retirement practice leaders, Segal Consulting and Sibson Consulting, both units of The Segal Group.
“I don't see the trend reversing,” Mr. Lawrence said.
“I don't think defined benefit plans are coming back” on the corporate side, Ms. Walton agreed.
Mr. Lawrence said there are several forces behind the trend.
“A number of corporate DB plans (have) closed to news participants and some of them...are frozen,” he said, which “tend to have a dampening effect on employer contributions” to the plans, Mr. Lawrence said.
Off financial statements
Overall, corporations increasingly seek to take defined benefit plans off their financial statements to reduce their financial risk, Ms. Walton added.
On the DC side, asset growth is being boosted.
Employers that choose to freeze or close defined benefit plans “oftentimes will provide a richer defined contribution plan,” such as higher matching contributions, said Rob Austin, Charlotte, N.C.-based director of retirement research, Aon Hewitt.
Aon Hewitt's latest “Trends & Experience in Defined Contribution Plans” report surveyed plan executives at 400 corporations, whose defined contribution plans have more than $500 billion in combined assets. Some 77 percent of respondents said a defined contribution plan is their organization's primary retirement plan. That figure is up from 55 percent in 2003.
The trend could lead to smaller internal staffs at plan sponsors to oversee retirement plan investments.
“Generally speaking you see more staff with defined benefit plans,” as it requires “more guidance and oversight and governance procedures,” Mr. Austin said.
The growth in DC assets is encouraging a move to different investment management structures, consultants said.
“The biggest challenge for the investment management industry today will be how do they...position themselves in, and have a better broader understanding of, the defined contribution marketplace,” Ms. Walton said.
“Historically many defined contribution plans...were primarily invested in mutual funds,” she said. “Now we've got significant pools of assets that are more institutionally oriented” in structure, such as commingled accounts and separate accounts, Ms. Walton said.
Of some 250 employers responding to Aon Hewitt's “2015 Hot Topics in Retirement” survey, 30 percent use some form of a non-mutual fund structure for their investment fund options for participants, Mr. Austin said. By contrast, last year's survey only showed 16 percent had done so.
P&I's data also demonstrates that change. Among DC plans in P&'s top 200, an average of 28.4 percent of the assets were in mutual funds as of Sept. 30, down from 30.1 percent a year earlier.
In terms of asset classes, consultants generally continue to see the vast number of DC fund options focused on traditional investment portfolios and target-date funds.
Only 7 percent of employers offered a specialty or alternative option, Mr. Austin said, citing Aon's survey.
“We see very few (plans) offering non-traditional (investments),” Mr. Austin said. “Even when they are offered, they are not picked up very much” by participants.
But boutique managers — if not non-traditional funds — are penetrating the ranks of DC fund offerings, consultants said.
“One trend we are seeing a little bit is this idea of white-labeling (customized) funds, creating a fund out of multiple funds or having one manager of multiple managers,” Mr. Austin said. This approach allows non-traditional managers access to DC plans for asset classes “that plan sponsors would not want individuals to be investing in on their own.”
“So there are definitely avenues that we can see for (boutique and alternatives managers) to place their foot into the defined contribution arena,” Mr. Austin added.
Overall, employers will pay more attention to “the defined contribution side, given the level of match (in contributions), given the level of participant investment contributions, in terms of re-evaluating whether or not a participant...will be able to retire on time,” Ms. Walton said.
This article appeared in Crain's Pensions & Investments magazine, a Chicago-based sister publication of Tire Business.
