Muddying the DC Waters: A Case for Simplification

Written by: Nick Curabba

We have blogged here in the past about the "DB-ification" of defined contributions plans.  By it we mean simply that as traditional defined benefit plans continue to be phased out of existence, the benefits community is increasingly looking to import some of the best features from those plans to the defined contribution world.  

The insurance industry, for example, is responding with a fervor of innovative product development that will help 401(k) plan participants to efficiently receive a guaranteed lifetime income stream from their account balances.  The mutual fund industry, likewise, has developed a suite of investment products designed to mimic -- at least from a participant's perspective -- professional asset management enjoyed by defined benefit plans.  At their most optimistic, consultants, plan professionals, and industry trade associations tout this development as a perfect solution to the apparent demise of defined benefit plans. 

Amid all this happy talk, Sherwin Kaplan of Thelen Reid Brown Raysman & Steiner last week in BNA's Pension and Benefits Blog put his finger on a troubling aspect of the new movement in defined contribution plans.  Along with importing some of the best features of the DB plans, might we also be importing the complexity and cost that ultimately led to the demise of DB plans in the first place?  Read the whole blog piece here. 

Many of us who have been engaged in the fee disclosure battles could hardly agree more with Mr. Kaplan.  The real danger to the continued enhancement of defined contribution plans, and to the voluntary nature of all workplace plans, is not that a handful of bad actors will cause some participants to suffer losses.  That is unfortunately going to happen regardless of the regulatory scheme in place.  The more pernicious result will be overreaction on the part of regulators that will drive employers away from voluntarily offering benefit plans at all. 

The concern about over-regulation is not a new one.  In fact, it is often times overused to the point of being ineffectual.  Mr. Kaplan's thoughtful piece reminded us, however, that benefit plan complexity is not exclusively the result of government intervention, but from a competitive marketplace of advisers and consultants.  To the employer, of course, the difference hardly matters.  More complexity comes at a price, and at some price the cost of sponsoring a plan will outweigh the benefits.  The real "losers" here are workers who may as a result have no workplace plan at all.