It’s no secret that employers over the last decade have been increasingly rethinking their retirement offerings. Whether it’s to reduce overall retirement costs, respond to new regulations or react to changing market pressures, plan sponsors across the country are steadily replacing the defined benefit plan of the past with the defined contribution plan of the present. Out with the DB, in with the DC. The consequences of that shift are significant.
Essentially, DC plans transfer the capital accumulation responsibility from the employer to the employee. Participants in a DC plan are tasked with deciphering personal retirement goals, implementing a savings and investment plan around those goals, monitoring progress toward those goals and distributing savings prudently over the course of retirement. Since the plan could be the primary source of retirement income for the participant in the years to come, the importance of effectively executing on these responsibilities cannot be overstated.
The plan sponsor’s role, meanwhile, is basically to augment the participant’s chances of success by paying careful attention to plan structure, component investment options, oversight and robust education. The good news is that sponsors of plans large and small appear to be stepping up to this challenge by engaging more third-party financial expertise and increasing plan governance. Even large plans with access to human resources, in-house counsel, treasury and other support appear to be increasingly outsourcing the fiduciary oversight role, as reported in PIMCO’s DC Practice report earlier this year.
DC Plans Take Aim
A good deal of what’s behind that transition can be traced to two important events: The implosion of Enron in 2001 and the passage of the Pension Protection Act (PPA) in 2006. For its part, the Enron meltdown not only resulted in the ultimate passage of Sarbanes-Oxley, it immediately suppressed the use of a company’s stock within its retirement plan offerings. As a result, plans up and down the spectrum began to promote the diversification of investment risk through mutual funds and other pooled vehicles.
Then PPA came along with its Qualified Default Investment Account (QDIA) designation. The Act, passed when many plans had participation rates as low as 50%, led to a good deal of automatic participant enrollments flowing straight into Target Date Funds. In short order, target date investment options migrated from what had been the exclusive realm of the institutional plan to a much broader audience.