Advice on navigating the DC distribution maze

PensionDCisions has published its 2010 US Sponsor Survey, which covers DC default design and plan characteristics.

This follows the same methodology as its UK programme, first reported in September 2007.

The aim of the research is to provide transparency regarding actual participant outcomes delivered by DC plans.

PensionDCisions surveyed 65 large-plan sponsors in the US, representing 1.7 million active participants and USD163bn (GBP104bn) in assets.

Two-thirds of these companies are listed in the Fortune 500.

Among a number of important conclusions, three observations stand out: value for money, influences in distribution and lack of transparency.

It is hard for plan sponsors to recognise whether greater complexity and higher fees (such as those often found in customised default solutions) represent an investment worth making to improve outcomes for participants.

It is possible these solutions may deliver superior value over time, but there is no evidence for this.

The route taken by plan sponsors through the distribution maze has an important impact on provider selection and plan design.

It is clear from this research that the involvement of a particular provider, such as the record keeper (third-party administrator) or investment consultant, can steer plans towards different designs and outcomes.

The resulting impact is often not apparent to plan sponsors and participants.

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 affect participant outcomes.

This represents a step change in the way DC plans evaluate performance.

Graham Mannion, managing director of PensionDCisions, said: 'As service providers compete for market share, pressure will increase for them to better understand customer needs and better demonstrate the value of their solutions.

'In parallel, the decision-making process for plan sponsors and participants is becoming more complex, making it more difficult to connect with the most appropriate solution.

'Rigorous insight into the risk-adjusted performance actually delivered to end consumers will enable all parties to make better decisions,' he added.

On average, equities account for 81 per cent of portfolio asset allocation during the growth stage, 72 per cent at 15 years from retirement and 50 per cent at retirement.

There are significant variations between the risk-adjusted returns of different sponsors' default solutions.

Over three years, additional risk (volatility) has not been well rewarded; over the last year, however, additional risk has led to greater returns.

Over three years to September 2009, the average annualised return was -3.0 per cent during the growth stage, -1.8 per cent during the pre-retirement phase and 0.6 per cent at retirement.

Active solutions generated higher returns than passive solutions over one year, but underperformed passive over three years.

In the service categories of investment consulting, record keeping and investment management, a small group of providers holds the lion's share of relationships.

Four investment-consulting firms account for 58 per cent of mandates, three record-keeping firms account for 67 per cent of mandates, and two investment managers account for 55 per cent of mandates.

Selection of investment consultant has a material relationship with use of active management and use of customised solutions.

Selection of record keeper has a material relationship with use of investment manager.

Seventy-two per cent of plans use an off-the-shelf target date fund.

In approximately half of these cases, the fund is selected from the same entity as that providing record-keeping services.

Thirteen per cent of plans use a customised solution and for many of these there is a lack of transparency regarding the underlying product composition and performance.

Plans using a customised default solution have, on average, USD2.3bn in assets.

Plans using off-the-shelf default solutions have on average USD2.2bn in assets.

The 2010 US Sponsor Survey analysed default design and plan characteristics across 65 large US DC plans.

Collectively the 65 plans in the survey represent 1.7 million active participants and USD163bn (GBP104bn) in assets.

Two thirds of the plans are sponsored by corporations in the Fortune 500.

The analysis was collated from the 65 DC plan responses, although not every plan answered all questions.

Performance data was at 30 September 2009.

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