Inquiring minds want to know: “Why have businesses taken advantage of options to reduce expenses in defined benefit plans, where the corporation picks up the tab, but made no effort to take advantage of opportunities to reduce costs in the defined contribution plans, where employees bear the cost?”
The kicker is that some of those inquiring minds are sitting in the Department of Labor (DOL), and they just might add teeth to that rhetoric.
Keith Dressel, VP at Paramus, N.J.-based Morgan Stanley, told Chain Store Age that the DOL has begun to consider this question, and he predicted employee investment plans could become a “regulatory environment within the next two or three years.”
Defined benefit plans, such as pension plans, have been on the decline, while defined contribution plans, such as 401(k) investments, have become the norm for most companies. Historically, both types of plans relied on public mutual funds (MFs) as investment vehicles.
However, as the size of corporate retirement plans have achieved considerable mass, MFs have become less efficient because whether a company invested $1 million or $50 million, administrative fees remained the same. There are no price breaks for economies of scale after the $1 million threshold.
“The majority of large corporations have eliminated MFs from their defined benefit plans because of the administration fees associated with a public mutual fund,” said Dressel. “It’s certainly a prevalent trend, and independent consultants have advised companies with large plans to move from MFs to separately managed accounts (SMAs), with one company’s plan as the investor, or collective investment trusts (CITs), where multiple companies are investing.”
Defined contribution plans have also gained potential leverage as they have grown in popularity and value, but fewer companies have taken advantage of transitioning defined contribution plans away from MFs to SMAs.
“When 401(k)s were first offered, they were expensive to administer and had very low balances,” explained David Napolitano, senior VP, Morgan Stanley. “The only logical vehicle for investments were public MFs. Over time, 401(k) balances have become much larger, so the investments can be handled at a much lower cost using SMAs, or synthetic mutual funds as they are also called.”