DC: The Next Frontier for Fiduciary Management

Psolve has used its 10th anniversary to advocate the use of delegated consulting for defined contribution plans.

(November 26, 2013) — The future of fiduciary management lies within defined contribution (DC), according to investment consultants Psolve.

The Punter Southall Group arm believes that, while DC schemes have so far been neglected by the fiduciary management industry, it is now time for this to change.

Many investment consultants have boosted their fiduciary management resources for DC over the past year: Northern Trust added Eric Peterson to its outsourced CIO function to work across defined benefit, DC, and Taft Hartley plans in the US in February, and Mercer hired Liana Magner to the newly created role of US delegated DC leader in May.

The key problem is how the typical DC plan approaches its default fund, said Britt Hoffman, head of DC at Psolve.

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The typical approach has been to use a simple mixture of equities and bonds, shifting members automatically from equities into bonds and cash as retirement nears, but this—as she and many others have argued—is sub-optimal.

“In the early years there is a risk of a big paper loss, discouraging DC scheme members from making more contributions to their pension. In the later years, there is a risk of equities being sold for bonds at unfavourable prices,” Hoffman explained.

The biggest issue is the growing governance burden facing managers of DC funds, and it is here that fiduciary management will develop its market, according to Psolve.

FuturePlanner, the Finmeccanica group’s DC scheme, is one of Psolve’s clients that has taken advantage of its delegated DC service. Mike Nixon, head of pensions, said: “We were being told about clever new things for the DB schemes that did not cost much. Why should our DC members miss out?”

Hoffman said the key turning point was realising that it was possible to implement a DC strategy that is much more aligned with the strategies traditionally used in defined benefit funds.

“This is a big step forwards – particularly because the risk and return needs for DC and DB are really not that different,” she said.

The shift into focussing on DC comes at a time when outsourced CIO business of investment consultants is expected to grow to 18% of their total assets, according to research from Cerulli Associates.

Psolve rival Cardano also celebrated a birthday this month, and marked its fifth anniversary by publishing the fiduciary management results of its clients. The fiduciary manager’s clients outperformed their peers on a liability base by 30 percentage points.

There is scant data on the performance of fiduciary managers and other outsourced providers. Pick up the December European edition of aiCIO for a full investigation into inadequacies of the market.

Related Content: Cardano Challenges Outsourcing Competitors with Five-Year Results and Who Knows Best about Hedging?