Public defined contribution plan executives are considering unitizing, a strategy corporate 401(k) plans began using 20 years ago.
Consultants say fee transparency is the main driver.
Unitizing involves blending a plan sponsor's defined benefit money managers to create mutual fund-like separate accounts for a companion defined contribution plan.
Among the public funds interested in unitizing:
• the $4.7 billion Municipal Employee Retirement System of Michigan, Lansing, unitized in October;
• the $50 million Sedgwick Deferred Compensation Plan, Wichita, Kansas, included unitizing questions on a recent RFP; and
• the $1.4 billion Vermont State Teachers' Retirement System, Montpelier, plans to discuss unitizing with its consultant.
Consultants also said executives at corporate 401(k) plans are showing renewed interest in unitizing because of an increased focus on fees and the recent wave of revenue-sharing lawsuits.
Last fall, companies including Lockheed Martin Corp., Bethesda, Md.; United Technologies Corp., Hartford, Conn.; Northrop Grumman Corp., Los Angeles; Caterpillar Inc., Peoria, Ill.; General Dynamics Corp., Falls Church, Va.; Bechtel Corp., San Francisco; Exelon Corp., Chicago; and International Paper were sued over revenue-sharing agreements, when providers receive compensation from other vendors.
Phil Seuss, a Chicago-based principal at Mercer Human Resource Consulting, said public and corporate plans alike are looking for ways to reduce costs, have more fee transparency and get more flexibility among investments.
Mr. Seuss said Mercer has two public plan clients discussing unitizing their funds. He declined to identify them.
On the corporate side, Mr. Seuss said, boards of directors say: "We have a DB plan here and a DC plan here. Why aren't we using the same fixed income for all our plans?"
William Schneider, managing director at consultant DiMeo Schneider & Associates LLC, Chicago, said DC plans continue to look more and more like DB plans, and unitizing fits right in.
"When you have 20 options in a plan, even the very sophisticated participants don't understand everything. The next step in the evolution is the time-targeted funds, but they have a fatal flaw. The flaw is they are using proprietary funds, of which some are great, some are OK, and some are crappy," said Mr. Schneider.
"What we've done is put in target funds using options in their own plan. Why wouldn't you have best of breed? Fidelity is good at managing money, but maybe not at allocating assets. Couldn't you do it better with managers running separate accounts? And it's cheaper."
Mr. Schneider added: "In the retail mutual fund world, you have fees built in to cover all the shareholder services. If you could eliminate that and reduce your costs, why wouldn't you? Plus, you can't negotiate with a mutual fund. Clients could negotiate with the money managers" if they decide to unitize.