The End of Plan Sponsors

Defined contribution (DC) plan sponsors see plenty of room for the system to grow, according to those sampled at Russell Investments’ recent client conference—even to the point of making themselves redundant. 

Of the 86 attendees—primarily corporate pensions—more than three-quarters (77%) said they support or might support multiple-employer DC plans running retirement savings on behalf of companies and public-sector employers. Half reported that they liked the idea, “but only if we get the right fiduciary reassurance,” while 15% agreed whole-heartedly saying, “Yes, this is how I would like my plan to work.” Another 12% gave a lukewarm “maybe.”

Fewer than one in five attendees felt the single-employer plan sponsor role would persist indefinitely.

An even larger majority of Russell clients predicted plans may or will one day exist without sponsors (83%) than potentially backed the idea to begin with. 

Bob Collie, Russell’s chief institutional research strategist for the Americas, posed the question to attendees: “Will we get sponsor out of plan?” Nearly half (47%) said an employer-free structure “will take off” given the right regulatory framework, or flat-out “yes” (2%). Fewer than one in five attendees felt the single-employer plan sponsor role would persist indefinitely. 

“These responses underline just how important fiduciary obligations have become to plan sponsors,” Collie said. “While the move from defined benefit to defined contribution reduced employers’ exposure to investment and longevity risk, it has tended to add to their litigation risk.”  

That risk could be substantially lessened under a next-generation DC system. According to Collie, a corporation or public employer would shop for and select a retirement plan provider, then turn back to its core business. Government or private-sector firms offering master trusts would sponsor these DC platforms, rather than employers. 

Australia, for example, has operated almost exclusively on the master trust—or superannuation—model for a number of years. Despite next to no defined benefit coverage, last month Mercer ranked the country second only to Denmark for the quality of its retirement system. 

American plan sponsors should not get too enthusiastic about implementing such a structure at home, however. 

“At present, the establishment of a multi-employer plan (MEP) is not straightforward,” Collie cautioned in his report on the New Orleans-based conference. “An employment-based or other organizational relationship among employers is generally required if a MEP is to be treated as a single entity, as opposed to a collection of single-employer plans.” 

Regulatory momentum has begun shifting in favor of easier access to MEPs, Collie said, but he gave no firm timeline on expected breakthroughs. 

Plan sponsors, for all their eagerness at the notion of exiting the DC system, may welcome time to adjust to the idea. Out of three “big potential areas of change” floated at the conference, the majority (56%) said they liked mandatory savings best. Risk sharing between employer and member came second (23%), just edging out third-ranked multi-employer DC plans.    

Related: Why Plan Sponsors Make Bad Plan Designers & American Failure