Fidelity Investments says it expects to bolster distribution of its defined benefit plans despite the overall shrinkage of the business in the face of defined contribution plans’ popularity and recent high-profile pension bankruptcies.
Drew E. Lawton, the president and chief executive officer of Fidelity’s defined benefit unit, Fidelity Management Trust Co., said most retirement assets are flowing into defined contribution plans and the flight of some defined benefit competitors from the business shows its weakness. The Boston asset manager, however, sees an opportunity to gain share in a shrinking market.
“We are committed to offering defined benefit plans,” Mr. Lawton said. “We believe there is a real opportunity in that business.”
Fidelity plans to add alternative capabilities to its defined benefit platform, including real estate and derivatives-based products, he said. Large employers want companies that can offer a broad roster of products, he added.
“There is going to be great growth in this going forward,” Mr. Lawton said. “Employers are still interested in offering pension products, and there are a smaller number of managers available to handle these assets.”
Fidelity’s defined benefit platform has steadily expanded its assets under management in recent years. The growth rate since 2002 has been 90.4%, to $39.6 billion at June 30. During the same period, Fidelity increased its defined contribution assets by 49%, to $624.9 billion. For the third quarter, the defined benefit platform reported 7.6% asset growth, to $42.6 billion.
“Certain large consulting firms have the size to offer both defined benefit and defined contribution platforms, but clearly the largest assets are in defined contribution plans,” said Geoffrey Bobroff, an East Greenwich, R.I., analyst at Bobroff Consulting. “Defined benefit isn’t the landscape it once was, but there are still firms [that] can do both.”
Ann C. Marhdt, a principal at Spectrem Group, a Chicago research company that examines retirement savings trends, said select providers, including Fidelity, insurance companies, and other large fund companies, will continue to target certain employers with defined benefit programs. But these providers will continue to try to offer “total retirement solutions,” she said.
“People are looking for a hybrid solution that offers both defined benefit and defined contribution in one platform,” she said. “I still think there is a demand in the market for certain components of what a defined benefit plan had to offer, but ultimately it will be in a new product.”
Mr. Lawton said the market is not abandoning defined benefit platforms. A fourth annual survey of defined benefit plan sponsors by Fidelity has reported that defined benefit funding levels are steadily improving. About 96% of plan sponsors in the survey indicated they were very or somewhat likely to continue offering a defined benefit plan to current participants during the next five to 10 years.
Fidelity research on 189 plan sponsors with assets ranging from $200 million to more than $10 billion said that the average corporate pension plan was fully funded (100.6%) during 2004, up from 97.6% the previous year. And the number of underfunded corporate plans has also dropped steadily, from 69% of all plans in 2002 to 50% last year.
“There are fewer plans than there were even 10 years ago, but there are a decent number of employers that continue to be committed to offering defined benefit programs,” Mr. Lawton said.
Though most new retirement plans are defined contribution by “a wide margin,” he said, the survey results indicate plan sponsors continue to offer defined benefit plans to both new and existing employees.
“Defined contribution plans are meant to complement, not substitute for, defined benefit plans,” he said.
The survey also said that 88% of plan sponsors kept their pension plans open to all employees and that 75% indicated they were very or somewhat likely to continue offering a defined benefit plan to new participants.
About 4% of public plans and 18% of corporate plans said they had frozen the plan to new entrants or closed it to all employees. Mr. Lawton said a nucleus of corporations and public entities exists that is committed to offering defined benefit plans.
The survey also said that 96% of plan sponsors said their employees older than 45 prefer defined benefit plans to other retirement vehicles.
“Plan sponsors see defined benefit plans as valuable recruiting and retention vehicles,” Mr. Lawton said. “In fact, almost half of survey respondents cited employee retention as their primary driver for continuing to offer benefits such as a defined benefit pension plan.”
Mr. Bobroff said pension plans are still attractive options for some public companies and some small and midsize professional businesses.
“Certain types of employer structures would lend themselves to offering a defined benefit program,” Mr. Bobroff said. “But the market will continue to shrink. As more defined benefit plans run off the books, and others abandon the concept, it is going to become a less important concept in the broad corporate world.”
But Spectrem’s Ms. Marhdt said, “New plan creation may be down in certain segments, but this is a desired retirement benefit that organizations still want to offer.”
