RK Choice Impacts Service Provider Selections

February 10, 2010 (PLANSPONSOR.com)Defined contribution plans could end up with differing plan design features and differing results depending on the choice of providers such as recordkeepers or investment consultants.

A news release about the U.S. DC landscape study by London-based  PensionDCisions, a DC plan consultant, said selection of recordkeeper is an important factor in a plan’s use of an investment manager, while the selection of an investment consultant is an important factor in determining the use of active management strategies and customized investment solutions.

The study also found that 72% of responding plans use an off-the-shelf target date fund and that in about half of these cases, the fund is selected from the same entity as that providing recordkeeping. Also, 13% of plans use a customized solution, and for many of these, there is a lack of transparency regarding the underlying product composition and performance.

Plans using a customized default solution have, on average, $2.3 billion in assets, while plans using off-the-shelf default solutions have on average $2.2 billion in assets, the survey found.

According to PensionDCisions, a small group of providers holds the lion’s share of relationships in the categories of investment consulting, recordkeeping, and investment management.  Four investment consulting firms account for 58% of mandates, three recordkeeping firms account for 67% of mandates, and two investment managers account for 55% of mandates.

The company said the survey also indicated that:

  • It is hard for plan sponsors to recognize whether greater complexity and higher fees represent an investment worth making in order to improve outcomes for participants.”It is possible that these solutions might deliver superior value over time, but factual evidence is lacking,” the study announcement noted.
  • Despite "huge" amounts of investment performance data, insight is in short supply and there is no efficient mechanism to enable plans to calibrate their design decisions.  “By benchmarking risk adjusted net returns actually delivered to plan participants there is an opportunity to help sponsors, providers and advisers better understand how different approaches to plan design and advice impact participant outcomes,” the survey announcement indicated.

“The decisionmaking process for plan sponsors and participants is becoming more complex, making it more difficult to connect with the most appropriate solution,” said Graham Mannion, managing director of PensionDCisions, in the announcement. “Rigorous insight into the risk adjusted performance actually delivered to end consumers will enable all parties to make better decisions”.

The 2010 U.S. Sponsor Survey analyzes default design and plan characteristics across 65 large U.S. DC plans. Collectively the 65 plans in the 2010 Survey represent 1.7 million active participants and $163 billion in assets. Two-thirds of the plans are sponsored by corporations in the Fortune 500.

More information is at http://www.PensionDCisions.com.