Employers battle to work out whether paying higher fees for investment management improves fund growth for staff in defined contribution (DC) pensions, according to a survey from PensionDCisions

The 2010 PensionDCisions US Sponsor Default Survey, also found that evidence was lacking on whether more complex investment management delivered higher returns in DC plans.

The research showed that the involvement of a particular provider, such as a third party administrator or investment consultant, can steer pension plans toward very different designs and outcomes. The resulting impact is often not apparent to employers and employees.

Despite huge amounts of investment performance data, insight is in short supply and there is no efficient mechanism to enable employers to calibrate their design decisions.

By benchmarking risk adjusted net returns actually delivered to pension plan members there is an opportunity to help employers, providers and advisers better understand how different approaches to pension plan design and advice impact employee outcomes. This represents a step change in the way DC plans evaluate performance.

Graham Mannion, managing director of PensionDCisions, commented: “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.”

The survey was conducted among 65 large plan sponsors in the US, representing 1.7 million active participants and $163bn (£104bn) in assets.

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Further key findings include:

ASSET ALLOCATION & PERFORMANCE

  • On average, equities account for 81% of portfolio asset allocation during the growth stage, 72% at 15 years from retirement and 50% 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. However, over the last year additional risk has led to greater returns.
  • Over three years to September 2009, the average annualised return was -3.0% during the growth stage; -1.8% during the pre-retirement phase and 0.6% at retirement.
  • Active solutions generated higher returns than passive solutions over one year, but underperformed passive over three years.

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    INTERRELATIONSHIP BETWEEN SERVICE PROVIDERS

    • 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% of mandates, three record-keeping firms account for 67% of mandates, and two investment managers account for 55% of mandates.
  • Selection of investment consultant has a material relationship with use of active management and use of customized solutions.
  • Selection of record keeper has a material relationship with use of investment manager.

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    DEFAULT SOLUTION DESIGN

    • 72% 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.
  • 13% 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, $2.3bn in assets. Plans using off-the-shelf default solutions have on average $2.2bn in assets.

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