Plan sponsors continue to turn to their defined benefit plan money managers when searching for a defined contribution service provider.
When Thomson Corp., Stamford, Conn., recently expanded the menu of investment options in its $1.2 billion defined contribution plan to 14 from eight, company executives included in the lineup a manager they already knew from its work in Thomson's roughly $1.3 billion defined benefit plan: Barclays Global Investors, San Francisco.
BGI had been running two domestic fixed-income portfolios -- a long-term government and a long-term corporate -- in Thomson's defined benefit plan, confirmed Tom Taggart, principal in public relations with BGI. It is now also managing three index funds in Thomson's defined contribution plan.
This use of BGI index portfolios for both its defined benefit and defined contribution plans underscores a trend toward institutionalization of defined contribution plans, said Rich Malconian, chief executive officer for U.S. defined contribution at BGI.
Companies are starting to apply the same "rigorous discipline" to their defined contribution plans as they do to their defined benefit plans, he explained. In general, defined contribution plan sponsors are concerned with the cost of delivering the plan and getting the most amount of services for the price they pay in management and other fees, he said.
In addition, more plan sponsors are recognizing their fiduciary responsibility toward the participants in their defined contribution plans. Plan sponsors are taking greater care to ensure the investment philosophies in their defined contribution plans are consistent with that of their defined benefit plans, Mr. Malconian explained.
In a litigious world, plan sponsors don't want a judge to ask them why they ran the plans differently, he said.
BGI has been the beneficiary of a lot of crossover business, he added.
"We are re-dedicating resources to (the defined contribution) business," Mr. Malconian said.
Data from Pension & Investments' directory of defined contribution managers confirmed growth of mutual funds in 401(k) plans has slowed: The use of mutual funds by defined contribution plans grew 16% between 1997 and 1998, but grew 66% between 1996 and 1997.
The larger plan sponsors are moving away from mutual funds, said Gregory D. Metzger, consultant with Watson Wyatt & Co., Chicago.
"The mutual fund industry has not yet figured out how to price mutual funds for the very large accounts. There is so much of a cost differential between separately managed, commingled and mutual funds, plan sponsors are finding it does not make economic sense to have mutual funds once they have a certain level of funds," Mr. Metzger said.
Under some circumstances, a $400 million plan could realize as much as a $1.6 million savings from switching to separately managed or commingled accounts, he said. And plans as small as $50 million could save money, he added.
Technology has made it possible for service providers offering separately managed and commingled accounts to provide daily unit values -- which, in the past, had been a stumbling block to their competing for defined contribution business, Mr. Metzger said.
Probably the biggest deterrent to a wholesale move from mutual funds is plan participants, he said. Simply put, they like name-brand mutual funds.
Les Revzon, president and chief executive officer of Shawmut Consulting Associates, Quincy, Mass., said the trend away from mutual funds hasn't touched the small and midsized plan market.
The movement by banks into collective investment trusts is one step away from mutual funds, Mr. Revzon said. "In-house, banks can do it for about 30 basis points vs. 100 basis points for mutual funds, and performance is not that different."
