Defined Benefit PlansBuried Treasure for IRA Rollovers

Most of the focus on IRA Rollover assets has been on Defined Contribution plans such as 401(k)/403(b)/457 and on luring existing rollover accounts away from competitors.

However, when Spectrem conducted a study, Capturing IRA Rollovers, in which we looked at the source of assets that were rolled over to IRAs during a 12-month period, we learned that more than 18% of assets rolling into IRAs came from Defined Benefit accounts such as traditional pension funds or hybrid plans such as cash balance plans.

With an average rollover of about $30,000, Spectrem estimates $45 billion to $50 billion will be rolled over from these accounts in the year 2001 alone.

For organizations that have not participated in the 401(k) boon, rollovers represent the next major opportunity to capture significant retirement saving dollars. Fueled by frequent job changes and aging baby boomers, annual asset flows rolling into IRAs will conservatively reach $320 billion in the year 2005 alone, Spectrem estimates.

Those organizations that are geared up to handle this massive flow of funds with dedicated services, advisory capabilities and special, easy to understand and easy to execute products will do well in capturing share.

Unlike 401(k) accounts, which are largely bundled services in which the investment manager is also the record keeper and participant service provider, large DB plans are mostly unbundled and services are spread across a variety of institutions. One firm provides investment management, another provides actuarial record services and a third produces statements for employees and answers questions.

While there have been moves toward outsourcing, employee servicing traditionally has been handled in house by the employer. Many of the investment managers of these assets are not in the business of gathering retail assets directly. For those who are engaged in retail activities, DB asset management in usually “siloed” in a totally separate division.

In most DB plans, the investment manager invests a large pool of assets for an institution with no record of the participants. The investment manager doesnt know who the participants are and the participants dont know who the investment manager is. With very few exceptions, there are no participant relationships and no retail relationships to grow and maintain. Capturing the DB rollover assets is therefore a pure acquisition play.

However, for those firms who manage 401(k) assets and are actively engaged in retaining those assets in retail IRA rollover accounts, capturing DB assets can be an adjunct to their DC rollover retention strategies. Many employees have both DB and DC plans. Capturing the DB assets can be an add-on to the efforts to retain the DC assets.

In some cases, the employer may actually welcome activities that lure vested, terminated employees out of pension plans and into prudent individual investments. The reason for this is it reduces plan costs (actuarial services, PBGC insurance premiums, etc.).

Spectrems study shows that about 10% of DB participants think they have money in a DB plan thats eligible for rollover. We believe the actual number of DB participants who have funds eligible for rollover is 3 to 4 times greater.

DB plans are not well understood by employees, many plans have added the rollover feature recently and participant communication in DB plans is typically very lean. Many participants in DB plans, particularly job changers, dont know that their pension money is eligible for rollover.

Spectrem estimates there were about 90,000 plans with $2 trillion in assets at the end of 2000. We believe this number has declined in 2001 due to plan terminations and adverse market action. Based on recent research we have conducted in the DB market, Spectrem estimates that between one-third and one-half of DB plans allow for lump sum IRA rollovers.

We examined the population of individuals that rolled over money from a DB plan. (See chart.)

Forty percent of DB rollover individuals want a guaranteed rate of return on their retirement investments and dont want to risk losing money, suggesting annuities may be an attractive investment for many of these individuals. Fifty-two percent report that brand name is important when selecting investments.

A large proportion of them (42%) report that already having money with a company is a major factor in selecting the company to manage their IRA.

Strategies for capturing IRA Rollovers include:

–Make sure your offering either includes or aligns with advisory services. The advisor is the single most influential factor in the rollover decision.

–Establish a relationship with the rollover participant well in advance of retirement. Many participants choose for their rollover, an organization with which they already have a relationship.

–Concentrate on the large balances over $50,000. 80% of the assets are here.

–Develop a painless process to transfer money to an IRA rollover. Ease and convenience are important factors in the rollover decision-making process.

To acquire DB assets for IRA rollover, augment the strategies above with the following:

–Ask if your customers have DB money thats eligible for rollover too. If they dont know (and many of them wont) offer to find out for them. If youre fortunate enough to have a DC advisory relationship, find out in advance about the presence and provisions of the companys DB plan too and make the DB balances part of the rollover discussion.

–Include some low risk, guaranteed return investments in your arsenal of options.

–In addition to DC balances, discuss DB balances in your rollover marketing literature. Many DB participants are not aware that their DB balances might be eligible for rollover.

–In employer seminars and workshops focused on retirees and pre- retirees, include discussion of DB balances and the choices participants have.

The treasure is there and its big. But its buried. Uncovering it takes effort. But not many firms are looking for it right now so the payoff is worth it. Even if you missed the DC IRA rollover, its still worth inquiring about the DB plan.

Laurie Cochran is director of Spectrem Group, a Chicago-based consulting firm specializing in the affluent and retirement markets. She can be reached via email at

lcochran@ spectrem .com


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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