Managing and Administering Defined Contribution
PlansWhat is the employer's
role in managing a defined contribution plan?
What are the different ways in which employers set
up their investment programs?
What are bundled and unbundled
What is the role of the recordkeeper?
What is the role of the trustee /
How often are investment options priced?
Q: What is the
employer's role in managing a defined contribution
A: The employer is responsible
for establishing the basic structure and for providing overall
management of the defined contribution plan. Investment
management responsibility includes establishing investment policies
and guidelines, and selecting and conducting due diligence on the
investment management firms or mutual funds. Some companies
also manage portfolios in-house, and some companies may offer
mutual fund windows or brokerage windows to participants to provide
more selection opportunities; certain investment management
responsibilities extend to these structures as well.
The employer is also responsible for choosing and monitoring the
recordkeeper (which may be an internal function), and the
custodian/trustee. Finally, many employers provide investment
education and communication to participants, either directly or
through an outside organization, although in the latter case the
employer retains fiduciary responsibilities.
Q: What are the
different ways in which employers set up their investment
A: Employers use a variety of
structures for investing and administering defined contribution
plans. The most widely used are separately managed accounts
and mutual funds. The following are examples of some typical
- Individual mutual funds or a family of mutual
funds. Employers choose an array of individual funds
for investing plan assets. This can be accomplished in two
ways - by selecting specific funds from a variety of mutual fund
providers, or by selecting a variety of funds from a specific
mutual fund company. Employers choosing the first approach
usually appoint a separate recordkeeper, or maintain internal
recordkeeping. Employers choosing one mutual fund company
typically use the "bundled" approach, whereby the mutual fund
company also provides recordkeeping services.
- Other pooled vehicles, such as bank commingled funds
and group trusts. Employers retain one or more
pooled funds, managed by banks or investment advisory firms, to
manage fund assets. The pooled fund appoints a
custodian/trustee to settle all trades in the fund, maintain
accounting records for all assets, price the securities and post
income gains or losses.
- Separately managed accounts with professional
investment management of funds. Employers retain
investment advisory firms to manage fund assets, or hire in-house
investment experts. Investment options may consist of a
single separate account or multiple separate and/or commingled
accounts. Participant account recordkeeping may also be
internal or external. The employer appoints an independent
custodian/trustee, as described below, to account for all
investments and settle all transactions.
- Mutual fund windows and brokerage
windows. Some employers offer participants a mutual
fund window, which allows individuals to choose from numerous
mutual funds in the marketplace. This option may offer a
limited number, or a multitude, of funds. Brokerage windows
allow participants to manage their own assets by selecting and
trading individual securities as well as mutual funds.
Back to top
Q: What are
bundled and unbundled services?
A: Bundled services include a
combination of all or some of the following:
- Investment management
- Trustee services
- Investment communication
- Retirement planning
An unbundled service structure means that the employer selects
and monitors each service provider separately. In this
approach, the employer negotiates fees for each service
separately. Bundled service providers charge a single fee for
all services, which may provide greater efficiency, but attribution
of those fees to the individual services may be
Q: What is the
role of the recordkeeper?
A: The recordkeeper is
responsible for maintaining individual participant records for
defined contribution plan assets. The recordkeeper posts
contributions, investment earnings, withdrawals and benefit
payments to the individual's account. The recordkeeper
allocates participant activity, such as changes in fund choices or
asset allocation, to the individual fund options. The
recordkeeper also administers employee loans.
In addition, the recordkeeper may provide a toll-free voice
response phone system or website to allow participants to access
account balances, fund performance, and benefit information.
These systems may also allow participants to transfer account
balances from one fund to another, redirect future contributions,
or change the level of contributions.
The recordkeeper may also offer a variety of other plan-related
services including discrimination and compliance testing and filing
required government reports.
Q: What is the
role of the trustee / custodian?
A: The trustee maintains custody
of the plan assets. It is the trustee's responsibility to
maintain accounting records for all assets, including individual
securities, to settle all trades, post gains and losses, collect
and post dividend and interest income, adjust for stock splits, and
price each security. Any holdings of commingled or pooled
funds are recorded by the custodian/trustee as shares or units of
that fund. The trustee interfaces directly with the
recordkeeper, who posts the investment earnings to participants'
The trustee may provide additional services, including
securities lending, performance measurement, government reporting
and proxy voting.
Q: How often are
investment options priced?
A: The number of defined
contribution plans offering daily pricing has been increasing over
the last several years. Most funds that are not priced daily
are valued on a monthly basis, although there are some funds on
weekly or quarterly pricing bases as well.
In 2000, 94% of CIEBA members surveyed reported that the funds
in their defined contribution plans are valued daily. About
4% of members offer monthly valuations.
Back to top
Click here for a
printable version(Requires use ofAdobe