The Real Problem with DC Plans Today

Last month we reviewed the biggest problems facing each of the constituents, concluding that the biggest problem is that the interests of the various constituents are not aligned — and sometimes they are in direct conflict.

While the DC plan design is attractive and perhaps even elegant from an employer’s perspective, that same design is at the heart of the issues now being reviewed by lawmakers and the media. Though some DB plans had issues with fees and transparency as well as some “conflicted” advice by institutional consultants exposed by the SEC more than a decade ago, there is much less concern about corporate DB plans than with DC plans because ultimately, employers are on the hook if the DB plan does not have enough assets to fund a participant’s retirement.

Different parties have to work together to create a good, functional DC plan that limits cost, liability and work for the employer while maximizing retirement income for participants. The record keeper, advisor, money managers, TPA (if applicable) and payroll vendor have to work in partnership with each other and with the plan sponsor. When one bundled provider performed all services, as was common in the early 1990s, the system was arguably more efficient, but also fraught with potential conflict. As the industry has unbundled, which will only accelerate with TDFs, it gets more complicated. This is why plan advisors acting as quarterbacks have become so popular. But no matter how good the advisor, there’s only so much they can do if the plan sponsor is not knowledgeable or cooperative.

Which brings us to what I think is the heart of the problem. Each TPSU program opens with two simple questions:

  • How many people focus their time exclusively on their retirement plan?
  • How many have formal training as a plan fiduciary?

After nearly 125 programs over the past two years, no one has raised their hand yet. The significant responsibility of running a DC plan has been thrust upon most people who are forced to learn on the job while handling 10 other responsibilities, especially in the small and mid-size market. They are barraged by sales calls almost daily. Meanwhile, those in the industry throw out terms and concepts about which they have no idea, including, for some, simple ones like TDF and investment committee. Yet these are the key decision makers, even if their decisions are limited to picking outsourcers to help manage the plan.

Until the DC industry convinces employers why a company’s DC plan is as important as the DB plan, plan sponsors will not hire experienced people or properly train their staff. Just as underfunded DB plans hit a company’s bottom line, older employees on the payroll who should or want to retire but cannot also affect a company’s P&L negatively.

So short of training and hiring the right people, companies can join a MEP either run by private entities or by the government, outsourcing everything other than evaluating the MEP. In recent guidance to states about creating retirement plans, the DOL was clear that private MEPs were not acceptable. So, either the private industry can either solve the problem or let the government take over for certain size companies.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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