PSNC 2014: The DB and DC Plan

June 5, 2014 ( - Total retirement outsourcing (TRO) can benefit employers that sponsor both a defined benefit (DB) and defined contribution (DC) plan, said Barbara Best, principal of Capital Strategies Investment Group, speaking at the PLANSONSOR National Conference.

“Plans have traditionally had an in-house actuary doing administration, trustee and custody work,” Best said. “The marketplace has moved to TRO with one service provider doing all these functions. TRO has transitioned because of technology, which allows participants to see their DB and DC [statements] together.”

“It is a huge benefit for DB and DC stakeholders to see the entire picture of their holdings in one place, to see their projected monthly income,” agreed Sean Deviney, retirement plan specialist and financial adviser with Provenance Wealth Advisors. “For the plan sponsor, there are different objectives for finance and human resources [HR]. For HR, TRO delivers huge time savings via one point of contact and level of accountability and one census for anti-discrimination testing. For finance, TRO can result in cost savings, particularly for large employers, since there is only one contract to negotiate, an easier auditing process and only one organization to go to.”

In addition, “a TRO system can provide daily volatility reports to CFOs, and, via a website, combined DC and DB information for participants,” added Rita Fiumara, first vice president of investments and institutional consultant at UBS. “TRO offers great data transmission.” In fact, some TRO providers have created combined participant applications for smartphones, Best said. “The technology that TRO providers are developing is just amazing,” Deviney said. “This allows plan sponsors to deliver an impactful benefit statement to employees.”

However, Fiumara, continued, TRO providers set the bar high when it comes to plan assets. “TRO scale matters,” she said. “A lot of providers won’t bid unless assets are $50 million or more. Still others won’t bid unless assets are a couple hundred million.” Further, many TROs offer competitive fees for the sponsor’s DC plan but not for its DB plan, particularly with respect to custodial fees, according to Fiumara.

Additionally, since TRO providers combine a host of functions, providers may have strengths and weaknesses, Deviney said. “As you go through RFPs [requests for proposals], you see not all vendors are created equal. The best TRO recordkeeper for a DC plan may not be the best recordkeeper for a DB plan. TRO also has tradeoffs on the investment side,” he said. It is also important to find out whether the vendor will have two different points of contact for the DC and DB plans, and whether they are outsourcing that function, he added.

Sponsors also have to do the math. “You may get better economies of scale by unbundling, and you also need to look at investment returns,” Deviney said.

For those sponsors that offer both a DB and a DC plan but are winding down the pension plan, the best way to communicate benefits is to instill many of the DB features in the DC plan, Best said. “We stress the value of income replacement. That has helped,” she said. “We also advocate them offering a DC plan with company matches.”

As to the future of DB plans in the next 20 years, Deviney predicted companies will continue to freeze their plans until interest rates rise. “Until then, they will continue to disappear,” he said.

“The public arena will not be able to afford to shut them down,” Best said. “In the private arena, many are waiting to improve funded status.”