Among the 200 largest pension funds, eight are close to passing a threshold: The assets of their defined contribution plans likely will soon surpass those of their defined benefit plans.
The eight include BP America Inc., General Dynamics Corp., K mart Corp. and Eli Lilly & Co.
Of them, only United Parcel Services of America Inc. has marked the milestone before, only to have the growth of its defined contribution assets slip behind that of its defined benefit assets.
Therein lies an example of the problem in general with most defined contribution plans, primarily 401(k) plans.
The asset allocation of most 401(k) plans is still too skewed to conservative investment choices, especially guaranteed investment contracts and their offshoot, stable-value funds.
That kind of asset allocation harms the positive impact of the growth in contributions - from both employer and employee - to 401(k) and other defined contribution plans. So each dollar invested in a defined contribution plan produces less return, less future pension income, than each dollar invested in a defined benefit plan.
Pension sponsors, with some notable exceptions, aren't doing enough in terms of offering greater investment choices, especially in comparison with their defined benefit plans, and in offering investment education and consultation. Yet, sponsors increasingly are relying on defined contribution plans, mainly 401(k) plans.
Based on Pensions' & Investments' survey of the 200 largest pension funds, 112 sponsors offer both defined contribution and defined benefit plans.
At 14 of these sponsors, their defined contribution assets have grown larger in size than their defined benefit assets.
At eight other sponsors, as mentioned, the assets of their defined contribution plans likely will soon dominate those of their defined benefit plans.
In addition, eight other sponsors use defined contribution plans virtually exclusively, bringing to 120 the number of sponsors that use defined contribution plans for all or part of their pension benefits.
With such increasing reliance on employee-directed 401(k) and other defined contribution funds, sponsors have to do more to steer, through education and diversification, assets to more longer term investments, having the potential to produce higher returns.
IBM Corp., Stamford, Conn., as reported earlier this year in P&I, is offering employees one-on-one financial planning advice. But exceptional efforts aren't limited to large companies.
Grand Trunk Western Railroad Co., Detroit, has raised the investment options for 401(k) plan to nine, managed by six different advisers. Even though it has only $14 million in assets, it has taken a decidedly non-off-the-shelf approach. In addition, it is thinking of adding two other equity choices: domestic small capitalization and international.
Both companies give reason for some hope. But if time is money, the other sponsors with defined contribution plans ought to hurry to improve their investment opportunities.
