As financially troubled states and cities grapple with their pension obligations, many institutional money managers anticipate a big public-sector switch to defined contribution from defined benefit plans — a change that could provide opportunities for advisers.
“We expect to see defined benefits in many public plans frozen or terminated over the next five to 10 years,” said Bill McDermott, head of defined contribution at Goldman Sachs Asset Management, New York.
He noted that newly elected state and local officials are entering office with deficit trimming on their minds, making traditional defined benefit plans fair game.
Changing to a defined contribution model “can save taxpayers trillions of dollars,” Minnesota Gov. Tim Pawlenty wrote recently in an Op-Ed in The Wall Street Journal.
While insurance companies dominate existing public 403(b) plans — generally annuity contracts for teachers and other school employees — experts believe that dominance might be ending as the movement among corporate sponsors to seek unbundled services spreads to public plans. This shift will benefit money managers serving the DC investment-only market, as well as advisers willing to provide educational services and guidance to plan participants.
Public plans are expected to follow Labor Department guidelines about offering advice to participants, said Jeffrey G. Robertson, a partner at Barran Liebman LLP, Portland, Ore.
Just as the Labor Department's proposed advice rule would deter brokers from advising corporate 401(k) plan participants if they collected additional pay for their investment recommendations, government entities might search for ways to provide their participants with independent advice.
“There is a desire to move to one basic standard of regulation for all methods of deferring compensation,” Mr. Robertson said.
“As DCIO expands, dollars flow into non-proprietary funds, and that opens the door for me to provide access to an adviser or to education other than the sales representative from the company,” said Mr. Robertson, who counsels private employers as well as municipalities.
“There's a growing market for independent advice, and I'm hearing more questions about it from entities that are at the same time juggling extreme loyalty to good long-term providers and a non-desire to take on the human resources task of running their own retirement plan,” he added.
Still, he warned that providing a spectrum of investment options was only a first step in a series of changes that would bring these plans closer to their 401(k) counterparts.
“You fragment the stranglehold of the single annuity product on the participants' experience and start to provide them with different investment options,” Mr. Robertson said. “But you're not taking the step across the bridge that says you can benchmark or get direct education from a third party — not yet.”