(Money Management Executive)
Though defined-benefit plans may be going the way of the dinosaur, it might be a little early to call in the taxidermists.
For fund companies, catering to the survivors can present a lucrative business opportunity.
"From a market-share perspective, the assets in these plans are pretty big," said John Randall, a relationship leader at AST Trust, a subsidiary of American Stock Transfer and Trust Co.
Meanwhile, the companies that have such plans tend to be very small. Mr. Randall offered the example of a medical practice with four employees and $50 million of assets. "This has been very, very profitable for us," he said last month at the National Investment Company Service Association's East Coast Regional meeting in Boston.
Many old, blue-chip companies are phasing out or freezing defined-benefit plans in favor of defined-contribution ones. Many industry watchers have suggested that the Pension Protection Act's 401(k)-favoring provisions, such as automatic enrollment, automatic allocation, and increased portability, sounded the death knell for the already endangered plans.
After all, administering traditional pension plans can be costly. When International Business Machines Corp., a true blue chip, announced last year that it would freeze its pension, the Armonk, N.Y., company said it projected savings of as much as $3 billion by 2010.
In fact, since hitting a high of 22.2 million in 1988, the number of workers enrolled in traditional defined-benefit plans dropped roughly 27%, to 16.2 million in 2005, according to data from the Employee Benefits Research Institute in Washington. Likewise, since 1980 the number of single-employer plans has dropped 74.4%, to 28,769 in 2005, according to the institute.
On the other hand, the number of defined-contribution plans has increased significantly, to 840,000, according to the Internal Revenue Service.
"Just because Verizon, Motorola, and Hewlett-Packard ended their plans doesn't mean [defined-benefit] plans are dead," said Jeffrey Croke, assistant vice president and senior project manager at MFS Retirement Services, a Boston unit of Massachusetts Financial Services Co.
Lynn R. Siewert, the president of Advanced Corporate Planning, a retirement plan consulting firm in Vancouver, Wash., said there is "a specific use and an expanding interest" in such plans.
That interest is most keen among sole practitioners and small professional offices with highly compensated employees, said Mr. Siewert, who did not speak at the conference.
AST Trust has carved out a niche in this area. "We have seen a huge spike in interest," Mr. Randall said; last month alone, his consulting firm received more inquiries about defined-benefit plans than it did all of last year, fueled in large part by awareness of the Pension Protection Act.
Unlike 401(k) plans, which, by law, cap the amount of money an employee can stow away each year, defined-benefit plans put the burden on the business to fund the plan to a set target. Small, established businesses, like a medical practice, typically have more reliable income streams, and are therefore better equipped to meet their obligations, than companies that have thousands of employees and are subject to price wars and consumer sentiment, such as airlines.
Furthermore, small companies often are employee-owned, so even though plan beneficiaries cannot shave off their salary-based tax liability, as they would with contributions to a 401(k) or defined-contribution plan, they still benefit, because the business can take a tax deduction for pension plan payments.
Many pension providers offer "turnkey" plans, in which the asset allocation and target retirement benefits are predetermined. Such plans are typically less costly to initiate, and $500 of that cost can be deducted as a business expense, according to provisions of the Pension Protection Act.
Craig Copeland, a senior research associate at the institute, said that such plans are especially attractive for highly compensated employees, because they can receive guaranteed payments of up to $200,000 annually after they retire, rather than worrying about accumulating enough savings to sustain themselves through retirement.
Mr. Croke said that providing pension plans to small professional offices can be lucrative for fund companies. "These are the kinds of accounts you want."
Also, Mr. Randall said, pension plan fiduciaries typically adhere to very disciplined investment philosophies, so when they choose to invest, their orders tend to be big ones, and their trades tend to be infrequent.
According to Mr. Siewert, only one in every 50 companies is a good candidate for such plans, but such companies give fund providers lucrative business.
"Contributions are not nickels and dimes," Mr. Siewert said. Compared to a defined-contribution plan at a large company, which may generate thousands of $25 contributions for an administrator to process each month, some defined-benefit plans consist of a sole practitioner who invests $100,000 a year.
"It's fewer transactions and less record keeping," he said.
In fact, IRS data shows that the country's 840,000 defined-contribution plans hold $2.68 trillion of assets, but the 26,000 defined-benefit plans hold $1.58 trillion. On a per-plan basis, defined-benefit assets outnumber defined-contribution ones roughly 19 to 1.
Furthermore, concerns about perpetuity or the longevity of the business are assuaged by the portability and increased options for disbursement offered by the Pension Protection Act.
Even large companies that do not offer defined-benefit plans, like MFS (which is majority owned by Sun Life Financial Inc.), have begun considering whether to begin catering to this sector, Mr. Croke said.
Mr. Siewert said he expects that trend to continue. "Anyone in the fund management business that thinks they are in the retirement business that doesn't do turnkeys is missing the boat."
