c The contributions 401(k) plan participants make to the Personal Pension Builder product offered by Merrill Lynch and MetLife are invested in MetLife's general account whose principal investments are in fixed maturities, mortgages and other loans and real estate. Incorrect information was in the April 18 issue.
Defined contribution plans are beginning to look and act like defined benefit plans.
"There is a movement back to a more paternalistic view" of how pension plans should be run for employees, said David L. Wray, president of the Profit Sharing/401(k) Council of America, Chicago.
Worried that employees are not participating fully in defined contribution plans or are not making proper investment choices, plan sponsors who have, or once had, defined benefit plans are figuring out how to take some of the best features of DB plans and use them to create better DC plans.
Congress "has given up" on defined benefit plans and is looking for ways to strengthen defined contribution plans, said James M. Delaplane Jr., partner in the law firm of Davis & Harmon LLP, Washington, at a Pensions & Investments' conference earlier this year.
The movement to make defined contribution plans more like defined benefit plans has many faces and uses many methods:
• Annuities as an investment option. This is the newest concept, in which participants invest as they would in any investment option except that annuity investments provide a steady income stream when participants retire.
• Automatic enrollment. This allows participants to be automatically enrolled in a DC plan unless they specifically opt out of the plan.
• Automatic deferral increases. This allows participants to automatically increase their contributions to the plan annually, much as the contributions on their behalf to a defined benefit plan automatically rise along with their salary.
• Automatic rebalancing. This is similar to the rebalancing that is done in defined benefit plans. If a participant has chosen a specific asset allocation, with, say, 60% in stocks and 40% in fixed-income, and market movements cause the portfolio veers far from that allocation, the portfolio will be automatically rebalanced back to the stated allocations.
• Different default options. Instead of the traditional conservative default option — like money market funds — many companies are moving to lifecycle funds or other diversified balanced funds as default options. This is being done because researchers found that many participants never move out of that option.
• Lifestyle/asset allocation funds. These are investment options with a mix of equity and fixed-income investments determined either by a participant's risk tolerance or a retirement date.
• Managed accounts. These are for participants who have little investment knowledge and don't want responsibility for managing their money. A customized investment account is formed and managed by an outside manager based on knowledge of the participant's personal financial situation.