Smaller DB Plans Rely More Heavily on Third Parties

Smaller defined benefit (DB) plans rely more heavily than large DB plans on third parties, i.e., asset managers, investment consultants, actuarial consultants and third-party administrators (TPAs), according to Cerulli. The smaller plans require more hand-holding for such essentials as filing regulatory paperwork, and they cannot afford some of the more expensive perks, such as frequent updates from the actuary.

“Consultants generally agree that there may be more upfront effort with smaller clients—educating, developing the relationship, building trust—but once they are on board, they take less time,” says James Tamposi, research analyst at Cerulli. Larger clients have access to liability hedging, overlay managers and derivatives to manage interest rate risk. Many small plans want these capabilities but cannot afford the expense.”

Small DB plans also tend to have a larger allocation to passively managed products due to their lower cost than actively managed products. They also are more loyal than large DB plans.

Additionally, small DB plans are more inclined to have an outsourced chief investment officer (OCIO), Tamposi says. “Because there is so much hand-holding with the investment consultant, smaller clients may decide to forego discretion altogether, letting an investment professional take the reins.”

For TPAs, working with small clients tends to be more time-consuming and difficult. “We often hear from TPAs that smaller corporations craft benefits around owners and management teams, making plan design more complex,” says Alexi Maravel, director at Cerulli. “Therefore, there is most consulting done upfront for the smaller plans. Larger plans’ structures tend to be less complex, because they pool a much larger and more homogeneous participant base.”