NEW YORK More U.S. corporations are planning major changes to their defined contribution plans this year, spurred by laws allowing investment advice and by employers desire to provide retirement income security to employees.
A survey by Buck Consultants LLC found that 65.2% of plan sponsors intend to change the design and plan communication of their defined contribution plans in 2007, compared with 36.8% that altered plans last year. Significantly, 82% of respondents said one of their top priorities in the next few years is providing retirement income adequacy. The survey polled 255 U.S. public, private, non-profit and government employers in December.
The focus on providing adequate retirement income is in turn creating a bonanza for consulting and investment advice companies. The survey found that 29% of companies now offer investment advice to plan participants and that 57% of those that dont, plan to do so.
Pure advice firms will benefit, and the two firms that have staked out a big position are Financial Engines and Morningstar, said Alan Vorchheimer, principal at the retirement consulting practice of Buck Consultants in New York. The other group is the mutual fund companies Fidelity is launching a product by the end of the year to get into this market.
In fact, Chicago-based Morningstar Inc.s wholly owned subsidiary Ibbotson Associates, which among other services offers investment consulting and managed account services has seen a significant increase in retirement assets and the number of plan participants tapping into the firms investment advice program.
In 2006 we had over a 100% increase in number of plan participants and in assets, and at the end of the year we had $8 billion in assets, said Peng Chen, president of Ibbotson Associates, which was acquired by Morningstar in March 2006.
Mr. Chen agreed with the Buck Consultant reports findings that companies are increasingly looking for diversified investment options while designing defined contribution plans. The survey found that 55% of respondents offer life-cycle/lifestyle funds to participants, with 38.9% adding the feature in 2006 alone; 32.6% said they plan to do so.
In addition, 42% of respondents use life-cycle funds as their plans default investment option, while 42.5% use money market/stable value. Although stable value is slightly ahead, Messrs. Chen and Vorchheimer both predicted it would take a back seat to life cycle in the next few years.
It used to be that if we didnt get an election from you, we would just put money in a stable value fund because our biggest concern was that you would lose money. Thats clearly changing now with people moving to these multiasset-class life-cycle funds, Mr. Vorchheimer said.
He believes the explosion of life-cycle funds will be slowed only if the stock markets become bearish.
Money market will be left behind by life-cycle funds until and unless there is a major correction in the stock markets, Mr. Vorchheimer said. If theres a correction, I dont think it will go back to money market; it will go back to something called a balanced fund that has 60(%) equities, 30(%) bonds and 10(%) cash.
Mr. Vorchheimer said survey responses were similar regardless of company size, except for when companies were asked what type of firm functions as the primary DC plan adviser. Smaller plans tended to pick record keepers, while larger companies chose consultants.
Record-keeping vendors provide (consulting) advice as part of their standard fees. So since its free, its very unlikely that small companies will go outside and hire that expertise, Mr. Vorchheimer said. I certainly would never imply that these companies arent very professional and dont do an excellent job.
But Ibbotsons Mr. Chen said his company often works with record keepers to provide advice to plan participants. The record keepers eat the cost of providing it or in some cases pass the cost on to the plan participants, he said. Other than record keepers, Ibbotson also works with 401(k) providers such as Merrill Lynch and AIG to provide investment advice.
Regardless of which provider is used, plan sponsors are going to be tapping into investment advice expertise in the future. It goes back to providing retirement income adequacy, Mr. Vorchheimer said. However, despite the focus on that, only 28% of companies actually monitor employee savings and investments to determine whether they are investing wisely.
That was surprising, Mr. Vorchheimer said.
If I am concerned with their retirement income adequacy, I would increase their benefits, but thats not the response we got he added. (Companies) are saying, We are going to give you every chance (to save), but ultimately its up to you.