Focusing on Smaller DC Plans

CapTrust and Lincoln Financial see potential in under-served segment

There is no doubt that defined contribution (DC) plans, which are already quite firmly entrenched in corporate America, are going to gain even more ground in coming years. The Pension Protection Act has made it easier for DC plans to penetrate, and advisors and plan sponsors have been working hard to educate people on both the benefits and the need for having an adequate DC plan in place.

Yet some believe that many smaller companies across the country, those with 100 to 500 employees, are still not doing what it takes to get a DC plan in place--not because of an unwillingness on their part, but more so because these companies have been ignored by the retirement finance industry.

"If you look at the retirement space today, you see that the DC landscape is very crowded in the mega end of the market, in companies that have more than 5,000 employees," says Don Roberson, senior VP at Philadelphia-based Lincoln National, who heads the DC plan distribution efforts of the firm's newly created Employer Markets Division. "Many are catering to this end of the market, but when you go to the micro side of the market, there is very little DC penetration."

The micro market is very poorly served, agrees Todd Jones, an advisor at CapTrust Financial Advisors in Raleigh, North Carolina. The DC plan business is booming, but players in that space are only interested in proposing plans to companies from the mid-market segment upwards, he says, so companies that are worth less than $10 million have really not captured their attention.

Lincoln Financial, though, believes that there is great potential in making a move toward capturing the micro end of the market, and the firm's Employer Markets Division is focusing primarily on it, Roberson says. "We see a huge opportunity in the micro market, since only 22% of companies with 100 people or less have DC plans in place, and less than 40% of companies with 500 employees or less have them," he says.

Last month, Lincoln significantly beefed up its DC distribution team and sales force. The recruitment process will continue through this year, with an additional expansion planned for 2008, and the effort will be mainly aimed toward capturing the micro market, Roberson says, by tapping into the connections both large-scale broker/dealers, independent advisory firms and third-party administrators have with these companies.

"The retirement product is one of the last investment options that both broker/dealers and financial advisors have brought to their clients, in particular the smaller companies," Roberson says. "The cornerstone of many relationships that these firms have, though, is the family-owned business, and our aim is to bring education, training and product to that segment of the market, which has been underserved."

Lincoln's key plan offerings are Lincoln Director and Lincoln American Legacy Retirement Product, both of which are multi-managed, group variable annuities that offer an open architecture and work well as a plan choice for smaller companies, Roberson says. The DC distribution team will be offering these through their dealings with broker/dealers and advisors, he says.

"Both the Lincoln American Legacy Retirement and Director products provide small companies with high-quality investment options and product flexibility that will enable employees to select the best retirement plan for their needs," Roberson says.

The Lincoln American Legacy Retirement product offers plan sponsors flexibility in its pricing and service model. The product's range of pricing options and service models assure plan sponsors they will have the right level of service to meet their retirement benefit needs, Roberson says.

Lincoln created its Employer Markets Division in the latter part of last year with a view to bringing together a number of disparate yet profitable business areas that focused on the retirement finance space, Roberson says. Streamlining and centralizing these business areas constituted almost $40 billion in assets, Roberson says, and 30% of Lincoln's net operating income.

"Bringing these divisions together helped create a common vision and allows us to take advantage of market synergies," he says. Today, the retirement market is north of $13 trillion, and DC plans make up about $4.5 trillion of that, Roberson says. Compared to any other retirement asset, the DC plans represent the fastest growing section of the market, and advisors and other intermediaries are also placing a greater emphasis upon the importance of DC plans, he says.

As DC plans continue to gain ground, the features they come with will become more sophisticated, Jones says.

"Many of these plans will be "auto-everything"--auto-enroll, with automatic qualified default investment alternatives (QDIAs) being lifestyle, lifecycle, and target date funds," Jones says. "Auto deferral increases are also coming, but won't be popular for a few years."

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