Plan sponsors have moved from DB to DC plans to escape the funding liability, but that liability may be back in DC plans.
The term “DB-ization” of DC plans seemed very positive when I first heard it. With automatic features, workers are automatically enrolled into a company’s retirement plan using professional managed investments that can automatically escalate. Though the funding liability shifts to the participant, it seemed like the perfect answer for CFOs. With little cost, work or liability, they can say that they are helping workers prepared for retirement. Task completed — time to move on to more important matters. No wonder it’s so hard to engage CFOs in their DC plans.
But when something seems too good to be true, it usually is. If workers have not properly funded their DC plan, when it comes time to retire, they continue to work. Older workers who, according to Viability AG founder Hugh O’Toole, do not have their “hearts, hands and minds” into their jobs pose a real problem. Not only are there higher health care and disability costs, but salaries and absenteeism are higher and productivity is lower, as is morale among younger workers. Do you really want to employ older workers eager to retire, making premium salaries with low productivity?
Like a whack-a-mole, companies may have thought they got rid of retirement plan funding liability when they moved to DC plans from DB — only to find that they have implicitly taken on a different kind of funding liability.
Not all older workers are bad – there are certainly situations where the premium paid to experienced professionals in a job not diminished by age is well worth it. But DC plans that shift retirement funding liability to workers may create a liability that most CFOs did not anticipate — a good thing for experienced plan advisors that have solutions for creating improved outcomes — and potentially an engaged CFO.
