The components of defined benefit (DB) plan administration depend on the status of the plan.
Jim Scheinberg, managing partner, founder and chief investment officer of North Pier Search Consulting in Marina Del Ray, California, says if a DB plan is closed to new entrants, plan sponsors do not have to worry about adding new participants to calculations; the demographic is known and finite and administration is a matter of accounting for service credits and accumulation of benefits. If the plan is frozen, there are not only no new entrants to the plan, but no benefits accumulation; administration includes investing to meet funding targets and paying out participants.
With an active DB plan, Scheinberg says, there are more components of administration but there is still not the daily activity as there is with defined contribution (DC) plans.
Emily LeTourneau, defined benefit business director at MassMutual in Enfield, Connecticut, says the components of DB plan administration are employee services and financial wellness, compliance, actuarial evaluations and investment management. Administration requires partnering with providers dedicated to the DB plan business as well those with actuarial expertise, she adds.
The Interplay of Providers
There’s not really a recordkeeper for DB plans, Scheinberg says. Even when a plan sponsor has both a DB plan and a DC plan and bundles services with one provider, the provider is the recordkeeper for the DC plan and the administrator for the DB plan. He says the administrator will handle adding new participants to the plan, maintain the payment function and, typically, be the custodian of plan assets.
In addition, LeTourneau says, administrators can provide reporting about administration, maintain participant websites and call centers, handle distributions elections and requests and handle requests for benefits estimates. “A plan sponsor may look for a provider that can take participant data on a payroll basis so there is no year-end data cleanup process. That makes it more streamlined and quicker,” she says. LeTourneau adds that some DB plan sponsors work with payment providers, but payment providers only make payments, whereas a plan administrator can monitor for distributable events and make payments.
The plan actuary is responsible for providing certain calculations necessary for plan sponsors to make their minimum required payments, as well as for their required funding reporting, Scheinberg says. These calculations can also inform the investment strategy for maintaining the funding health of the plan. He says frequently the actuary also has administrative functions, such as preparing certain tax and Pension Benefit Guaranty Corporation (PBGC) documentation and filings.
A good administrator can provide plan and participant reporting to plan committees and actuaries to make forecasting exercises easier and to inform de-risking and asset/liability conversations between actuaries and investment providers, as well as to facilitate administrative plan changes such as freezing the plan or changing the benefit structure, according to LeTourneau. The administrator may also provide actuarial services, as MassMutual does.
LeTourneau says DB plan sponsors have key fiduciary responsibilities for investments. They should make sure they have a registered investment adviser.
There are several different roles and functions when it comes to investment management, Scheinberg says. “A large could plan could have in-house folks managing investments, but that is less common these days. Most are now outsourcing all or some investment management,” he says.
The traditional investment consultant relationship makes asset allocation recommendations—in some cases informed by an asset-liability study performed by the actuary—monitors investment managers, and makes rebalancing or additional asset class inclusion suggestions.
Scheinberg notes that over the last 10 years, there’s been a growing trend of taking decision making for investments away from the plan sponsor. An outsourced chief investment officer (OCIO) monitors the investment consultant as well as implements recommended strategies. “An OCIO can do so without consulting with the plan sponsor or investment committee,” he says. “The plan sponsor and committee still meet regularly and are informed by the OCIO. And they work together to determine what the plan’s investment policy will be.”
LeTourneau says providers that serve as administrators may also offer investment services, as MassMutual does. “We work with advisers to get investment recommendations and implement them. And we have a full flexible investment platform, with mutual funds, [exchange-traded funds] ETFs, [collective investment trusts] CITs and more sophisticated investments,” she says.
Not Enough Attention to Investment Management?
LeTourneau says investment reviews should be done quarterly, or perhaps monthly for larger plans.
However, Scheinberg says, “We’ve found from collective anecdotal experience that investment management is somewhat of an afterthought for DB plans. In addition, the large move toward de-risking and liability-driven investing is frequently driven by the desire to have known and predictable funding. For larger plans, decisions are often made because companies have to report on earnings reports the cash flow effects of the DB plan.”
For smaller plans, insurance companies will have investment solutions, provide investments and administration and actuarial work, and these companies don’t get enough focus from retirement plan committees and are not overviewed nearly as often as providers in the DC space, Scheinberg adds.
“This is ironic because the performance of assets of the DB plan has a direct impact and implication on the financial success of the plan sponsor. If the plan underperforms then a larger check will need to be written by the plan sponsor to maintain the plan,” he says.
Scheinberg also thinks plan sponsors should be looking at investments quarterly, depending on the plan’s asset size. In addition, they should be evaluating all service providers independently on a periodic basis to make sure they are getting good value as well as effective advice.
RFPs for DB Plan Providers
Another area of key fiduciary responsibility for DB plan sponsors is the selection and monitoring of service providers.
But Scheinberg, whose firm focuses on provider searches, says it almost never sees routine requests for proposals (RFPs) for actuaries unless the plan is having a specific difficulty. “We always see overpayment for actuarial services,” he notes.
He adds that there is also far too little monitoring of investment service providers. “In the DC plan space, litigation and fee disclosures required under Employee Retirement Income Security Act (ERISA) Section 408(b)(2) make plan sponsors more aware of need to monitor investment providers.
“That section [of ERISA] also covers DB plan service providers, but the entity that typically has standing to sue is the plan sponsor, not participants, and a plan sponsor wouldn’t sue itself. That’s the reason it is not as urgent to oversee service providers. However it should be because it has implications for the overall organization,” Scheinberg says.
When it comes to plan administrators and custodians, he says there’s not such a need for heavy scrutiny, outside the fact that some have very antiquated processes and systems. “So service issues will dictate whether an RFP is needed.”
Scheinberg adds that every time it issues RFPs for investment advisers, OCIOs or actuaries, it finds efficiency improvements.
LeTourneau says with all the mergers and acquisitions in the retirement plan industry, providers are scaling back on actuarial services or investment capabilities, so it may be time for a review to make sure providers are committed to that business or if there are additional services.
There are many compliance obligations for DB plan sponsors throughout the course of a plan year, LeTourneau says. MassMutual provides a fiduciary calendar so plan sponsors know when to submit contributions, file 1099s for distributions and make PBGC and Form 5500 filings.For plan sponsors with calendar-year plan years, PLANSPONSOR’s 2020 ERISA Plan Compliance Calendar can help.
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