Defined Contribution Plans

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 services?
What is the role of the recordkeeper?
What is the role of the trustee / custodian?
How often are investment options priced? 

Q:  What is the employer's role in managing a defined contribution plan? 

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 programs? 

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 fund designs:

• 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.

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Q:  What are bundled and unbundled services? 

A:  Bundled services include a combination of all or some of the following:

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 difficult. 

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' accounts. 

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.

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