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Providing For Participants

Over the years, there have been dramatic changes in providing retirement benefits for employees. Pension plans were originally designed to supplement Social Security. The choice of most employers was to establish a defined benefit plan which provides an employee with a defined monthly benefit at retirement. In my father's day, many employees stayed with one company until retirement and the defined benefit plan was one of the ways an employer showed its appreciation for the long-term commitment since typically, longer years of service translated into higher monthly benefits at retirement.

However, American lifestyles have changed. It is unusual for an employee to remain in his/her current job for an entire career. In fact, it has been estimated that employees will change jobs 8-9 times on average before retirement. With this lifestyle change came the problem of pension portability. How does an employee receive retirement compensation if he/she has moved from job to job? This helped spawn the growth of defined contribution plans. Defined contribution plans do not guarantee a specificbenefit at retirement.Rather, an account is set up for each participant into which contributions are made by the employee, the employer, or both. In addition to allowing participants to carry their account balance from job to job, defined contribution plans frequently reduced costs for employers and provided more direct control over pension costs.

Under the early versions of defined contribution plans, there were usually a limited number of investment options available into which participants could direct contributions. Plan sponsors selected the investment options, with varying degrees of risk and return, ranging from a stable value option to balanced funds and equity funds. Subsequently, as a result of the finalization of Section 404(c) of the Employee Retirement Income Security Act (ERISA) in 1992, plan sponsors started taking a very close look at the types of investment options offered under their respective plans and how participants use those options. Section 404(c) requires plans to offer at least three distinctively different and internally diversified investment choices with transfers between them permitted at least quarterly. The burden on the plan sponsor is to select the appropriate range of options and monitor them to assure continued suitability. In conjunction with investment choice, participants need to be able to independently choose how their assets will be invested among the options and will need to be given sufficient information to make informed decisions. These provisions added to a plan sponsor's time and staff commitment relative to administration and distribution of employee communications.

Today, with the growing concern over Social Security and what, if any, level of benefits will be available to younger generations, 401(k) plans have become one of the most important tools for us to provide for our own retirement. The investment community realized this fact and exploded into the markets with a multitude of investment options available for plan sponsors to include in their 401(k) plans. For the plan sponsor, this created the daunting task of making appropriate investment selections to offer participants and educating participants so that they could make appropriate investment decisions.

Over the last 10 years, 401(k) plans have grown by leaps and bounds with assets currently totaling in excess of $1 trillion. Concerned about their fiduciary exposure, more and more plan sponsors began outsourcing responsibilities previously kept in-house, including recordkeeping, communication and management of funds. After careful due diligence, plan sponsors selected the appropriate specialists to provide each of the services for the 401(k) plan. This arrangement provided the plan sponsor the convenience of adding or replacing investment options, as well as replacing the recordkeeper or trustee should those entities no longer provide the appropriate service to meet the needs of the plan.

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