Veteran Plan Advisers Advocate for DB Expertise

Private sector defined benefit plans may seem like a thing of the past, with headlines mostly focused on businesses engaging in pension risk transfers to take the obligations off their books.

But when looking at the numbers, private DB assets have remained relatively steady in recent years at about $3 trillion, based on tracking by the Investment Company Institute. According to two veteran plan advisers, there are several reasons why advisers currently focused on defined contribution plans should expand into DB expertise and services.

Retirement Advisor Council members Tommy Ford, a corporate retirement director for Morgan Stanley, and Jim Robison, a managing director at Strategic Retirement Partners, discussed why DB plan expertise can be a useful tool for a plan adviser. Their answers were given as written responses.

PLANADVISER: Why should a DC-focused plan adviser get involved with the DB space?

Jim Robison

ROBISON: It’s part of being a truly professional consultant. Pension plans, even those that are frozen, are still present. There are opportunities to be a knowledgeable independent voice to help an employer manage and oversee their entire retirement benefits package. You have options on how to best engage with the client, including working with one of the pension risk transfer specialist firms to help offload those liabilities or conduct a search for PRT firms. 

It’s also helpful to understand the culture of the client—the employer. In many instances involving traditional pensions, the DB plan is part of a legacy benefits structure that is there for good reason. You need to understand why it exists, what the client is looking to address and then how that feeds into its defined contribution plan design.

For example, if you’re working with professional services firms, such as lawyers, doctors, dentists, accountants or engineering firms, there are great opportunities to help those professionals set aside significantly larger sums of money via cash balance plans. They need a professional who can pull together the asset and liability pieces on their behalf. 

FORD: DB plan consulting is a way to differentiate you and diversify your practice’s revenue stream. DB plans are a natural pathway to expand your practice into the “total retirement benefits” consulting realm. Your practice already has the principles and process in place to consult on DC plans—and guess what? Those principles and processes are the same foundation for DB plan consulting, give or take some new resources and tools.

Perhaps a more timely reason is that many C-suite executives (CEO, CFO, etc.) are Baby Boomers or Gen Xers, and they could retire within the next five to 15 years. They’ll be replaced by younger counterparts who might be blindsided by their lack of familiarity with these DB plans. You being able to help the newer generation of executives navigate that challenging and unfamiliar environment will be a tremendous value-add.

PLANADVISER: How has your DB practice enhanced your business?

Tommy Ford

FORD: While our practice is 401(k)-centric today, as DC plans have become the preferred retirement benefit over the last two decades, our team’s roots are in DB plan consulting. Like other retirement plan advisers in the industry, we became really good at DC plan consulting, but we continued consulting on our clients’ DB plans over the years. The common misconception of plan sponsors and some peers of ours is that if a DB plan is frozen, they don’t require attention—that cannot be further from the truth.

Fast forward to today, and DB plans are actually making a resurgence as a viable retirement benefit solution. So whether it’s helping a client take a fresh look at DB plans as talent retention and attraction strategy, or the C-suite looking for cost and risk control within their current plan, our team is prepared to help. Furthermore, we are actively prospecting frozen DB plans. Services we are providing range from plan liability management through de-risking activities (e.g. lump sum windows, pension risk transfers/lift-outs, and liability-driven investing strategies) to fee reasonableness studies to asset management (e.g. we assist with their plan’s asset allocation guidance along the way). This has been a nice complement to our DC plan business.

ROBISON: I came from the world of DB plan consulting with Mercer and Marsh McLennan Agency before forming my own independent consultancy. We have conducted DB plan design studies, helping clients understand whether a traditional DB plan continued to make sense for them organizationally.

We provide a valuable service for various clients, including health care systems, manufacturers and professional services entities. Our clients typically have legacy benefits, and because they are unsure what to do with them, they seek a knowledgeable, independent voice. We help them decide where to take their plan: Maintain it? Modify it? If they were to change it, what might it look like?

PLANADVISER: What advice do you have for a DC adviser preparing to start advising on DB plans?

ROBISON: DB plans are driven by a stream of liabilities that have been accrued over working generations. Advisers need to understand how those liabilities are manifest and whether they align with a given employer’s overall cost structure and benefit structure. 

FORD: Head counts in a DB plan are the liabilities—head count equals risk, and higher risk equals higher costs. Along with understanding the liabilities of DB plans, you also need to understand the different admin service provider roles/responsibilities. Who is the custodian, who is the paying agent (i.e. who cuts the checks to pensioners), who is the actuary, who are the investment managers, and who is the investment adviser? Understanding the liabilities and the service providers are the basics—that is the launch point. From here, there are plenty of resources that advisers can leverage to help with the next steps.

PLANADVISER: Where can an adviser start in getting to know DB plans?

ROBISON: You can and should learn from your industry peers. Within the RAC, as well as outside of the council, there are specialist organizations and learned individuals. These include actuarial firms and DB administration firms. Find friends, make friends and find a way to learn from them. 

Approach them, as well as other member firms that have DB structures as a part of their service model. Take the time that you need to understand the various ways to measure funded status, for example. The value of these types of providers also is that they have reliable experts you can count on so you don’t have to be a DB expert.

FORD: There is at least one pension risk transfer breakout session per year at the RAC meetings. Make it a priority to attend one of these sessions, because they have great peer-to-peer information sharing, as well as insights from RAC’s DB plan partners. Keep learning and tapping into the network. 

The network can also help advisers appreciate the importance of macroeconomic factors as they relate to DB plan consulting. Inflation, of course, adds to future costs, and the interest rate environment will dictate whether certain de-risking activities make sense.

PLANADVISER: How would you start the discussion with a client 401(k) sponsor that also offers a DB plan to eventually win the business?

ROBISON: Ask the client for authorizations to begin talking with the DB actuarial and administration group and learn from those individuals how the plan began, how it has been operating, its funded status, and cash flow requirements. Ask what legacy issues are present. Where have there been pressure points? Learn from those individuals and seek to gain an understanding of what’s really driving this structure on behalf of the employer. 

Then interview the employer and include the chief financial officer, treasury director and, to some extent, the HR and benefits side in those conversations. Seek to understand their perspective. What’s their view on this benefit structure over the next decade or so? Weave that into your understanding of the total benefit structure. That’s the legacy side.

Then, how do they view the DC plan or plans as complementary to the DB plan? That will help you gain a better understanding of the total benefits package. 

FORD: Once you get the OK to talk with the admin group and you have the responses to your strategic questions, go back to the C-suite and talk in their language: cost and risk. I always thank them for what they have shared, acknowledge their priorities, but then bring it back to the launch point: See if they would be open to your team conducting a liability-and-cost study so they fully understand these (if nothing else, for due diligence purposes), as well as how these are either headwinds or tailwinds to their vision and goals for this plan.

Then leverage the resources and tools that are available and together craft a diagnosis and recommended plan of action. Give them a second opinion on their plan the way someone would seek a second opinion on a medical issue.