Defined contribution plan service providers stand their best chance in years of grabbing a chunk of the more than $300 billion in public defined benefit plans.
More than a dozen states are contemplating a switch to an optional, mandatory or hybrid defined contribution plan. So far, only a handful have switched.
But players in defined contribution services for universities and colleges - TIAA-CREF, New York, and VALIC, Houston - are ready. In some states, they have been instrumental in moves to allow public university employees to opt out of the state-run defined benefit plan and into an alternative, defined contribution plan.
Company executives hope this, in turn, will help them win lucrative new contracts as state retirement plans begin to offer mandatory or optional DC plans, especially for public school employees.
Officials from the Teachers Insurance and Annuity Association-College Retirement Equities Fund and Variable Annuity Life Insurance Co. say the multicampus optional retirement plan model would work well for K-12 teachers.
At TIAA-CREF, press secretary Claire Sheahan said TIAA-CREF has received many inquiries from public pension and school district officials on defined contribution plan information.
Ms. Sheahan said the company is not actively marketing its services to school pension fund officials or lobbying state officials for law changes to permit DC plan conversions. "But if a state comes to us asking for information or services, we'll provide it."
For example, Washington state teachers' retirement system officials asked TIAA-CREF for information when a hybrid defined contribution plan was being designed. And TIAA-CREF joined many other vendors last October, when public fund officials from California held a public hearing on defined contribution plans.
TIAA-CREF approach changing?
But political events may have forced the company to change its somewhat tentative exploration of the public school retirement market into a more full-fledged assault.
The 1997 the Taxpayer Relief Act of 1997 eliminates TIAA-CREF's tax-exempt status as of Jan. 1, 1998. In light of the need to find new markets and revenue and fewer restrictions on its business activities, Ms. Sheahan said the company is examining all of its processes and businesses.
Although she couldn't predict how aggressive TIAA-CREF will be in the public school market, she pointed to the availability of TIAA-CREF's rollover individual retirement account program to public school employees and their spouses as a sign of the company's interest.
TIAA-CREF now manages more than $200 billion in retirement plan assets. Its 10 investment options and full record-keeping and plan administration services will form the core of its package for teachers' retirement services, said Ms. Sheahan.
TIAA-CREF has not been shy about creating a market where it has a product to fill it.
For example, TIAA-CREF helped draft a bill, now under consideration by the Wisconsin State Legislature, which would establish an optional retirement plan for new academic employees of the University of Wisconsin system, said Steve Baas, press secretary for the bill's sponsor, Rep. Scott Jensen (R-Waukesha).
Mr. Baas said officials from TIAA-CREF helped draft AB 331, which has passed the Assembly and is stalled in committee before the Wisconsin State Senate. Mr. Baas predicted the bill will pass when the Legislature meets later this fall.
While TIAA-CREF's products would fit the system's requirements, he said the company still would have to compete for the business.
VALIC has 'vested interest'
VALIC officials, meanwhile, are unashamed about exhibiting their vested interest in the conversion of defined benefit plans into participant-directed defined contribution plans.
"We are concentrating on state and public plans in areas where we already have constituents using other VALIC products," said Linda Lund, VALIC's director of government affairs.
"We have initiated activity (to get defined contribution plans established) in some places because teachers have asked for access to our products for their primary retirement plan. .*.*. We also provide support and information where interest is expressed by a state pension plan administrator," she said.
VALIC hired lobbyists to work in Illinois in 1995, when the General Assembly was considering legislation to establish an alternative defined contribution plan or an optional retirement plan for employees of publicly funded universities and community colleges.
Jim Hacking, executive director of the $8.4 billion Illinois State Universities Retirement System, Champaign, said while SURS' staff wrote the legislation, lobbyists from both VALIC and TIAA-CREF helped ensure passage of the bill. SURS is searching now for at least three service providers for the optional retirement plan, but Mr. Hacking said neither VALIC nor TIAA-CREF is assured of a contract.
Girard Miller, president of ICMA Retirement Corp., Washington, said his company will not hire professional lobbyists to push defined contribution plan legislation.
Model should work well
After 20 years of developing and promoting the use of alternative defined contribution plans for public universities and community colleges, vendors think the model will work well for public school teachers.
School employees, teachers and administrative staff want the portability of retirement assets that DC plans provide, said Joe Osborne, senior vice president of marketing at VALIC.
The teachers' pension niche has particularly captured the attention of companies such as insurers that are accustomed to the multicampus, individual sales approach needed to market an ORP. For example, TIAA-CREF is included in 46 ORP programs in 40 states; VALIC is in 26 programs.
There are 81 such alternative retirement programs offered in the higher education market.
Meanwhile, public teachers' retirement systems hold hundreds of billions of dollars that few insurance companies and mutual fund managers have had much access to, since defined benefit plan portfolios are typically managed in separate accounts.
"This is a large and attractive market that TIAA-CREF hasn't tapped yet. But they will have some competition in this market they've targeted from the 403(b) plan players that cater to the public school market that TIAA-CREF doesn't. It's hard to gauge the likelihood of TIAA-CREF's success in this market, but they are the gorilla of pension fund managers and have the capacity and the resources to chase this market and probably capture a big part of it," said Cathie Eitelberg, director of the government practice in the Washington office of Segal Co.
But before TIAA-CREF, VALIC and their competitors can take a stab at winning the management contracts, the public plans have to offer some type of defined contribution plan component.
DC plan to become alternative
Consultants are divided about whether the DC plan model ultimately will replace the defined benefit plan as a primary retirement vehicle. But many believe public entities slowly will adopt defined contribution plans as an alternative, rather than as wholesale replacements.
"In higher education, there was a strong feeling that public universities had to offer TIAA-CREF because private institutions did. It was necessary to add an ORP for recruitment and portability purposes," said Kim Nichol, a consultant in the Chicago office of Buck Consultants Inc.
"But there's reluctance on the part of other kinds of public plans to offer an alternative retirement plan option because of the problems caused by unfunded accrued liabilities in some public defined benefit plans. Those liabilities are to be paid off by a formula based on an increasingly higher payroll. But if members are allowed to opt out of the DB system, the payroll base will be reduced. States will then have to make larger contributions and that won't be an easy obstacle for legislators to overcome as they consider passing legislation to create DC plan options," said the Segal Co.'s Ms. Eitelberg.
VALIC officials disagree.
"Every K-12 school administrator we talk to is worried at first that an ORP would ruin the DB plan. But we've had 20 years of experience with ORPs (that) renders much of the debate about adding a DC plan option superfluous," said Chuck Robinson, vice president of national markets at VALIC.
"The higher education model has proved for years that ORPs don't affect the DB plan adversely. A very rough ballpark guess is that between only 30% and 40% of faculty with a choice tend to choose the ORP option. Many are younger staff with lower total asset levels, and the transfer of the assets doesn't make that much difference (to the defined benefit plan). Once this is understood, it will help to speed up the move to offering a DC option in public plans," Mr. Robinson said.