Pensions & Investments' annual special report on the 1,000 largest U.S. pension funds offers an array of eye-popping data and trends that in turn raise questions and issues worth examining. An especially troubling one the data illustrate is the large discrepancy in the use of managers between defined benefit and defined contribution funds like 401(k) plans.
Sponsors in general don't make available to participants in defined contribution funds the full range of portfolio management services they use for their defined benefit funds. That difference has to put defined contribution funds at a disadvantage.
For example, the data published in the Jan. 23 special report show many pension sponsors employ upward of 30 investment managers for their defined benefit plans. One sponsor uses at least 69 investment managers; another sponsor employs at least 77.
These sponsors didn't provide a separate listing of their defined contribution managers. But based on previous reports, the 401(k) choices don't in any way approach their defined benefit array of managers.
In total, sponsors in the report have large defined contribution funds, some bigger than their defined benefit funds. Typically sponsors offer for their employee-directed 401(k) funds five or perhaps 10 investment choices. To comply with the voluntary 404(c) pension regulations for their 401(k) funds, sponsors have to offer only three investment choices.
The discrepancy in the management of defined benefit assets and defined contribution assets is way out of proportion. One result of it is sponsors in general spend less time managing the investments of their 401(k) and other defined contribution plans, and monitoring and selecting the managers for them, than they do for their defined benefit plans.
Either sponsors believe they need many, many managers, or they don't. It's evident 401(k) participants so far have gotten shortchanged in access to investment choices. It is a reason, although not the only one, defined contribution performance tends to be lower than defined benefit.
Not all sponsors have discrepancies. Owens-Illinois Inc., based on other reports, offers its 401(k) participants investment choices made up of the same portfolios run by the same managers it uses in its defined benefit plan (although it doesn't report that in its top 1,000 profile).
Whether an equalized approach is the best is an issue. There are plausible reasons for running a defined benefit fund more aggressively than a defined contribution fund, such as their different investment horizons and the investment ability of 401(k) participants.
But at least a few sponsors like Owens-Illinois believe they have to take just as much time with defined contribution assets as they have with their defined benefit. Most sponsors neglect to address this discrepancy in managing the two types of funds at their own peril. For defined contribution plans to succeed, especially where they are the main pension plan, they need to provide a sufficient retirement income to participants. Investments, more than contributions, provide the primary way of building assets.
Sponsors, which enjoy many regulatory, administrative and payroll cost savings for using defined contribution plans, jeopardize support of 401(k) and other defined contribution plans. That loss would hurt participants, too, who also enjoy advantages from such plans that defined benefit funds cannot provide, including benefits portability and investment decision-making.
