BOSTON -- The 900-pound gorilla of the money management industry -- Fidelity Investments -- has turned its attention to a relatively new institutional niche market: total defined benefit plan management.
Through Fidelity Management Trust Co., its institutional arm, Fidelity has begun to offer a package -- DB Solutions -- to plan sponsors with less than $250 million in defined benefit assets. The program already has attracted $250 million total from eight clients, with several pending in the next few weeks, said Michael A. Forrester, senior vice president. Two clients that recently converted to DB Solutions are the $25 million defined benefit plan of Forbes Inc., New York, and Phoenix Transit System, with $36 million in plan assets.
Unlike most existing total defined benefit plan management programs, Fidelity's program gives smaller clients access to in-house managed commingled funds that span the full spectrum of asset classes, Mr. Forrester said.
Fidelity offers consulting services to customize asset allocations to match client asset-liability requirements -- a necessity because Fidelity's target client base of emerging plans tends not to work with outside investment management consultants, he noted.
Fidelity's DB Solutions also leaves ultimate decision-making power over asset allocation and exact commingled funds used to the plan sponsor. Fidelity acts as a directed trustee for the defined benefit plan, rather than becoming its discretionary trustee.
Fidelity's program also provides actuarial, trust, disbursement and administrative services.
The growing popularity of total defined benefit plan management programs was the driver behind Fidelity's product introduction. Vendors that have been offering total management programs for some time -- including SEI Asset Management, Oak, Pa., and Frank Russell Co., Tacoma, Wash. -- have been enjoying strong sales this year.
SEI, for example, as been offering a manager-of-managers version of a total defined benefit plan program for about five years and has attracted $55 billion from about 800 institutional clients, said Edward Loughlin, president. Year-to-date, SEI has added 37 new institutional clients with about $2.6 billion in assets.
Reasons for interest
More than 150 institutions in SEI's client base have more than $500 million in assets under management, demonstrating a trend toward total outsourcing by larger plan sponsors. Mr. Loughlin attributed the new interest by sponsors of all sizes to:
* the increasing complexity of investment management products;
* companies' realization that they are responsible for managing an increasingly large amount of assets in an area outside of their core competency; and
* trustees' awareness of fiduciary exposure in an era of higher market volatility.
"The pension fund is often the largest asset of a business, but companies just don't have all the people and infrastructure to manage that asset pool efficiently," said Mr. Loughlin.
SEI offers investment management primarily in 10 strategies, mainly in institutional mutual funds, with a few clients also using commingled and separate accounts, said Mr. Loughlin. The manager-of-managers strategies allow SEI to pick best-in-class managers to construct its portfolios and easily add or terminate managers to fine tune management style. For example, SEI recently hired Security Capital Global Capital Management Group, Chicago, a real estate investment trust manager, further diversify its U.S. Small Capitalization Portfolio, said Robert Prucnal, SEI vice president of marketing.
Some of SEI's new clients for total plan management include the more than $500 million defined benefit plan of Outboard Marine Corp., Waukegan, Ill.; the $140 million plan of Rheem Manufacturing, New York; the $140 million defined contribution plan of CIT Group, New York; the $150 million defined benefit plan of Convergis Corp., Cincinnati; and the $150 million defined benefit plan of Simplex Time Recorder, Gardner, Mass. SEI was just hired to manage between $100 million and $125 million in a large-cap growth and value outsourced strategy by Carpenter Technology Corp., Reading, Pa. The remainder of the company's $950 million plan remains managed by existing managers.
Frank Russell, which, like SEI, has been actively marketing total defined benefit plan management for about seven years, is on track to bring in $4 billion in new sales by the end of the year, said Bryan Weeks, managing director-strategic accounts team. Sixteen new clients have hired Russell for total defined benefit plan management year-to-date.
`A surge this year'
"There's definitely been fast growth, a surge this year, in this product," he said.
Some of Russell's total plan management clients are the $2.2 billion plan of The Casey Family Foundation, Seattle (Russell manages $1.4 billion); the $230 million plan of AgFirst Farm Credit Bank, Columbia, S.C.; the $500 million 403(b) plan for the MBA Ministers' Benefit Association of The Assemblies of God, Springfield, Mo. (Russell manages about $250 million); the $140 million defined contribution plan and the $265 million defined benefit plan of Mercedes Benz USA Inc., Montvale, N.J.; and the $150 million defined benefit plan of Reckitt & Colman Inc., Wayne, N.J.
Russell now manages about $13 billion in the total outsourcing strategy for 81 clients, Mr. Weeks said.
Like SEI, Russell also uses a manager-of-managers approach as the investment strategy for its program. In addition to delivering superior performance and freeing the sponsor from investment management oversight and administration, Mr. Weeks said clients have been drawn by the 10% to 20% reduction in the cost of investment management. Because Russell can realize economies of scale, he said, investment management costs for the manager-of-managers program have been negotiated below levels plan sponsors could wrangle on their own.
Both SEI and Russell are offering their total defined benefit plan investment program globally and report similar interest from foreign plan sponsors. SEI is beginning to target South Africa in particular with its packaged program, said Mr. Loughlin.
Fidelity is not offering its total management program yet to international clients.