A Lesson in Fine Tuning

After a decade of change, defined benefit plans still are relevant to the retirement system.

Ten years ago, PLANSPONSOR fielded its first Defined Benefit (DB) Administration Survey. Our hope was that the research would become a one-of a-kind resource for the private-sector DB industry, offering insight both into the types of plans that composed the market and the administrative service providers that supported it. The survey came at a time when the role of DB plans as the third leg of the retirement stool—along with Social Security and personal savings—was quickly being replaced by that of defined contribution (DC) plans. However, the industry still presented an opportunity for administrators and asset managers to capitalize on decades of growth, even as the prominence of the industry itself continued to fade.

Nearly a decade later, the DB industry is still maturating. This year’s survey profiles 19 providers vs. the 28 listed in 2010. Of the 14 providers that reported data in both surveys, many have seen plan counts increase, suggesting that provider consolidation and natural plan migration have thinned the competitive landscape. Not surprisingly, the result of these market forces has been a consolidation of business, as our 2020 survey accounts for more plans and more participants than it did in 2010.

Still, even the most committed providers face substantial headwinds from the market’s continued evolution. A Lesson in Fine Tuning Most notably, the past decade saw an increase in the percentage of frozen plans, which jumped to 68% this year from 22% in 2010. Further, retired and separated participants now account for 63% of all DB participants—vs. 56% in 2010. Both factors can weigh on long-term revenue growth by limiting the potential for organic growth in participant counts.

Another threat comes in the form of the growing pension risk transfer (PRT) market. A LIMRA Secure Retirement Institute (SRI) study last year found that eight in 10 private-sector DB plan sponsors that also offer a defined contribution plan are at least somewhat interested in a PRT transaction. LIMRA also reports that, annually, the number of PRT contracts had increased 76% from 2014 to 2018, and a record 501 U.S. single-premium pension buy-out contracts were sold last year, totaling $28 billion.

While the next decade will likely see the continuation of these trends, the news is not all bad. Interest in cash balance plans has grown in recent years thanks to legislative changes that made such plans easier to administer and fund. Perhaps most importantly, DB plans are having an impact on DC plan design, where professional asset-allocation solutions such as targetdate funds (TDFs) and managed accounts are working to maximize participant savings. Next up may be an increased level of dialog on how DC plans generate retirement income, something DB plans have achieved with mixed results. Fortunately, though, we have their legacy to learn from and improve on. —PS Research