(October 11, 2013) — Harmonizing investment approaches for defined benefit (DB) and defined contribution (DC) plans may well lead to improved performance, according to a paper.
Russell Investments’ report stated that while sponsors often share managers between DB and DC plans, many utilize different tactics and strategies in terms of asset types, investment vehicles, and governance.
This discrepancy could lead to questions about the fiduciaries’ policies and possible negligent governance practices.
“Harmonization doesn’t require that DB and DC plans be managed in exactly the same way—in union—but the plan sponsors should at least look to apply a consistent set of investment beliefs and, where practical, to directionally align their investment approaches across both DB and DC plans,” the report said.
The big problem? DC plans are still not getting the level of attention that DB plans have been receiving for decades, the study concluded, particularly as DC plans are overtaking retirement plans for future generations.
To align approaches across plans, Russell recommended that DC plans be diversified and managed by multiple managers, not by a single record keeper with various products.
The paper also said many sponsors of DC plans adopt passive management due to lower fees and its reputation as a safer option—in contrast to DB plans with a variety of active managers across asset classes. However, Russell pointed out that passive management offers “no opportunity to outperform.”
Fiduciaries should be more diligent in managing DC plans particularly due to the participants’ relative inexperience.
“Most are really looking to their plan sponsor fiduciaries to provide prudent, appropriate investment options that give them the best chance of meeting their retirement income needs,” Russell said.
Looking specifically at investment vehicles, the paper suggested DC plan sponsors to move away from mutual funds and more towards separate accounts and commingled funds—vehicles generally used by DB plans.
These diversified funds could reduce costs for sponsors and fees for participants as assets grow, the report said.
Regarding governance processes, Russell argued plan sponsors need to spend more time and internal resources in managing DC plans, especially as DB plans are progressively diminishing.
“Harmonizing your investment approach across plans may lead to improved outcomes and a more defensible fiduciary position,” the report concluded.
Related content: The Middle Ground Between DB and DC, Active Management: The McDonald’s of Investing?