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Don't Call in the Taxidermists Yet: DB Plans Offer Business Opportunities


While defined benefit plans at large corporations may be going the way of the dinosaur, it might be a little early to call in the taxidermists.

And 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.

Meanwhile, the number of employees these companies have tend to be very small. Randall offered the example of a small medical practice with four employees and assets of $50 million. "This has been very, very profitable for us," he told attendees at the National Investment Company Service Association's East Coast Regional meeting in Boston last month.

With many big, old, blue chips phasing out or freezing defined benefit plans in favor of defined contribution plans, 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 defined benefit breed.

After all, administering traditional pension plans can be costly. When true-blue chip IBM announced last year it would freeze its pension, the Armonk, N.Y.-based corporation said it projected savings of as much as $3 billion by 2010.

In fact, the number of employees in the workforce enrolled in traditional defined benefit plans dropped roughly 27% to 16.2 million in 2005 from a high of 22.2 million in 1988, according to data from the Employee Benefits Research Institute (EBRI) in Washington.

Likewise, the number of single-employer plans has dropped by 74.4% between 1980 and 2005, from 112,208 to 28,769, according to EBRI.

The number of defined contribution plans, on the other hand, has increased significantly to 840,000 in the United States, 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 in Boston.

"There is a specific use and an expanding interest," said Lynn R. Siewert, president of Advanced Corporate Planning, a retirement plan consulting firm in Vancouver, Wash., who did not speak at the NICSA conference.

That interest is most keen among small professional offices, with few, but highly compensated, employees, and sole practitioners he said.

"We have seen a huge spike in interest," said Randall, whose company has carved out a niche in this area. In fact, in January alone, Randall said his consultancy saw more inquiries about defined benefit plans than during all of 2006, 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, in defined benefit plans, the burden is 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 large companies with thousands of employees that are subject to price wars and consumer sentiment, such as an airline.

Furthermore, small companies are often employee-owned, which means that while plan beneficiaries are not able to 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 its pension plan payments.

Many pension providers offer less expensive so-called "turn-key" pension plans, in which the asset allocation and target retirement benefits are pre-determined. 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.

For highly compensated employees especially, such plans are attractive because rather than worry about accumulating enough savings to sustain themselves through retirement, defined benefit plans allow employees to receive guaranteed payments of up to $200,000 annually after they retire, according to Craig Copeland, senior research associate at EBRI.

For fund companies, providing pension plans to small professional offices can be lucrative, Croke added. "These are the kinds of accounts you want," he said.

Although only one in every 50 companies are good candidates for such plans, those that are provide fund companies lucrative business, Siewert said.

Pension plan fiduciaries also typically adhere to very disciplined investment philosophies. Therefore, when they choose to invest, their orders tend to be big ones, and their trades tend to be infrequent, Randall said.

"Contributions are not nickels and dimes," Siewert said. Compared to a defined contribution plan at a large company, which may result in thousands of $25 contributions for a plan administrator to process each month, some defined benefit plans consist of a sole practitioner who invests $100,000 per year.

"It's fewer transactions and less recordkeeping," Siewert said.

In fact, IRS data shows that while the country's 840,000 defined contribution plans represent $2.68 trillion in assets, the 26,000 defined benefit plans represent $1.58 trillion. On a per-plan basis, that means assets in defined benefit plans outweigh assets in defined contribution plans 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, like MFS, which do not currently offer defined benefit plans, have begun considering whether to begin catering to this sector, Croke said.

Siewert expects that trend to continue.

"Anyone in the fund management business that thinks they are in the retirement business, that doesn't do [defined benefit plan] turnkeys is missing the boat," he said.

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