Defined benefit plans have valuable tools to deal with tumultuous market events such as Standard & Poor's downgrading of the United States credit rating. Those tools include a complex array of asset classes, investment instruments and allocation strategies, as well as great access to expert consultants and money managers.
But defined contribution plan participants tend to be without even a basic tool: an investment policy to guide their allocations to meet their long-term objectives.
Defined contribution plan sponsors should provide defined contribution participants with better tools, drawing creatively on their own experience, or investment management industry experience with defined benefit plans.
They have sought to make up for the lack of sophisticated tools and investment options by adding target-date funds. But the funds, once thought of as a solution to provide long-term growth and controlled risk, have come under criticism because they assume one size fits all for each group of participants. They also often use simplistic asset allocation strategies and a narrow choice of investment alternatives.
Plan sponsor investment education efforts are worthwhile and improving. But they go only so far in keeping up as the markets become more volatile and investments more complex. Defined contribution investment portfolio choices are limited. Participants often are confused about how to allocate for long-term asset growth, and how to determine an appropriate risk level and achieve that level. Besides, for participants, the management of their defined contribution assets can be no more than a part-time pursuit.
For defined contribution plans to succeed, the tools available have to provide better ways to help participants manage and oversee their plans and objectives for the long term, and not just offer more allocation choices.
Neither defined benefit plan sponsors nor defined contribution plan participants can afford to keep shoveling increasing and unforeseen contributions into their plans to make up for unfavorable markets, as has occurred this year. The plans will be unsustainable. This is a primary reason corporations have terminated their defined benefit plans. Likewise, while it may seem defined contribution plan participants have no choice but to stay in the game, they can always stop contributing.
Defined contribution plan sponsors, with the help of consultants and managers, need to find ways to incorporate defined benefit management techniques into their DC plans to help the participants manage their assets.
That effort would profit everyone, and at the same time tend to dampen market volatility by reducing the impulsive short-term reactions of at least some groups of institutional investors.