Defined contribution

Transition managers grab more DC business

Complex investment options a reason

More white-label and unitized investment options in defined contribution plans are boosting the business of transition management firms hurt by the decline in defined benefit business.

“Ten years ago, about one in 10 transitions were in DC; now it's more like 40% to 60% of all transitions. DC has become a material part of the transition management business,” said Paul Sachs, Philadelphia-based principal at Mercer Sentinel Group, the asset-servicing consulting business of Mercer LLC.

“It's been an evolutionary change, but also a noticeable one,” said Mr. Sachs.

Some companies — including State Street Corp. (STT) through its State Street Global Markets unit — have had dedicated teams focusing on defined contribution plan transitions for years. But other firms — like Penserra Securities LLC — are newer to the DC market. All are targeting both when a plan switches to white-label funds from mutual fund options and after the fact, when manager changes within each white-label option require a transition.

At Fidelity Capital Markets, the institutional trading unit of Fidelity Investments, the transition management business has seen 50% year-over-year growth in DC assets in the last three years, said Kevin Byrne, New York-based vice president, head of transition management.

Ben Jenkins, senior vice president and global head of transition management, Northern Trust Corp., Chicago, said DC transitions “have tended to be very large, multibillion-dollar efforts, but there is a new trend over the past 18 months toward more residual or follow-up transitions. Maybe three months later, let's say, the plan may need to rebalance those options.”


Mr. Sachs said the complexity of the shift from mutual funds to white-label funds, separate accounts and blended or unitized options isn't exclusively when new options are introduced, but later when the options are being used.

“DC plans have grown in size and sophistication,” Mr. Sachs said. “With increased scale, it's become much less expensive to have separate accounts that are unitized at the participant option level. So options may include growth, value and core managers in a single participant option. If the plan offers large-cap, midcap and small-cap options, you could have nine underlying managers. If one of those is in trouble, you'd do the transition below the surface so that the participant experience isn't disrupted by the investment manager change.”

Another challenge is when newly merged companies combine 401(k) plans, as was the case with CenturyLink Inc., Monroe, La. Its DC plans were combined with those of Qwest Communications International Inc. and Embarq Corp. in 2012. The CenturyLink Dollars & Sense 401(k) Plan and Trust and the CenturyLink Union 401(k) Plan and Trust had a combined $5.236 billion in assets as of Sept. 30, according to Pensions & Investments data. Each plan has 40 investment options, according to BrightScope Inc.

“We were doing multiple plan consolidation, which was the catalyst for us wanting to use a transition manager,” said Kathleen Lutito, president and chief investment officer at CenturyLink Investment Management, Denver.

State Street Global Markets, Boston, was chosen to handle the DC transition, although Ms. Lutito said other transition managers were looked at as well. State Street is transition manager for CenturyLink's $12.9 billion defined benefit plan. Wells Fargo Institutional Retirement and Trust is the 401(k) plans' record keeper.

DC transitions have “a different set of challenges” from those in DB plans because of the number of people involved in the transitions, said Thomas Schoenbeck, senior investment consultant at Hewitt EnnisKnupp, Chicago.

“With a DC transition, there are a lot more people involved — the client, the custodian, the managers, the record keeper. It's particularly complex when moving from traditional mutual funds to white-label funds, where after the transition there's also a need to rebalance and sometimes having to swap out managers. In those kinds of transitions we have worked on, there are weekly calls with trustees and the other parties.”

Added Keith Wilson, head of transition management at Penserra Securities, Orinda, Calif.: “DC plans are a different animal. For one thing, you have to work around whether there's a blackout period or not. If there is, you have a lot of work to do with cash coming in during transitions. Plus, mapping from a fund to a custom-made option is difficult.

“Another issue has to do with large corporate plans that are creating their own target-date options and using derivatives as well as equity and fixed income in them. All that makes DC transitions more difficult.”

Lengthy process

Time also makes DC transitions more complex. While DB transitions can take as little as a few days, in some instances, those on the DC side can take months — sometimes even more than a year.

“It's different (from DB) because of the logistical coordination required,” said Mercer Sentinel's Mr. Sachs. “You're operating in a daily NAV (net asset value) environment. You must give a participant 30 days notification of a manager change in an option, but with all the coordination work involved for the record keeper, the custodian, the transition manager and the plan, it can take 10 to 13 weeks of preparation for the transition.”

“You need experienced project managers working full time on a transition for a longer period of time” than with a DB transition, said Ross McLellan, founder and president of transition management data analysis firm Harbor Analytics, Hingham, Mass. “With a DB transition, a project manager can do two or three at a time; with DC, it requires constant monitoring and working with a lot of different people - the plan trustees, the custodian, the record keeper, the managers. Some (transition managers) use automation to monitor, some throw more people at it.”

Much of the growth in DC transition management has been under the radar as searches for such managers aren't generally conducted through requests for proposals, but instead are done by plan executives based on the recommendation of investments consultants.

Every transition requires a new pitch, and because of that, “a manager's reputation is everything,” said Peter Weiner, senior managing director, head of Americas asset owner business, State Street Global Markets, Boston. “Even if we did a previous transition, we still have to pitch for these every time. But you get a comfort level with a plan sponsor that you hope will work in your favor.”

He said State Street conducted 100 DC transitions in 2014, of which 10 involved transitions ranging from $5 billion to $20 billion.

CenturyLink's Ms. Lutito said future transitions of underlying managers in the CenturyLink investment options will be done on a “case-by-case basis.”

This article originally appeared in the June 15, 2015 print issue as, "Transition managers grab more DC business".