Companies moving to a Defined Contribution (DC) plan from a Defined Benefit (DC) plan may have a sense of false security. While DC plans mitigate the funding burden largely away from the employer to the employee, there are still risks associated with DC plans being underfunded according to Hugh O’Toole at Viability Advisor Group. O’Toole maintains that it is imperative to continue to engage senior management in the company 401(k) plan (or other DC plan) to avoid the pitfalls of underfunded DC plans.
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Wed, Apr 27, 2016 4:00 PM – 5:00 PM EDT
Featuring: Hugh O’Toole
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In many cases Plan Advisors have “moved the CFO to a Defined Contribution plan, to some degree, to get away from that funding and investment risk”, says O’Toole. This has led senior management at many companies to become less concerned about a DC plan.
“So their engagement on defined contribution is almost naturally less”, added O’Toole.
O’Toole advises that despite the transfer of funding and investment liability to the plan participant under a DC plan, risk and liability still exists.
“Everybody thought the risk disappeared when we put the responsibility on the employee,” explains O’Toole. Not so he says. Under-funded DC plans have “unintended consequences” that can come back to the employer in later years. O’Toole cites his research into companies whose participants have under-funded DC plans.
“That employee that can’t retire on time will be an older worker that you are paying more from a wage, healthcare, risk-management standpoint. That additional expense is coming back to the employer’s financial statement.”
O’Toole’s company, Viability Advisor Group actually began by engaging senior management at companies offering DC plans to learn of the issues surrounding viability of a DC plan and the company itself. He states that his findings often revealed a disconnect between the company senior management and the impact of a DC plan on the long-term financial health of the company.
O’Toole says that engaging the senior management about the financial importance of closely managing the DC plan took a lot of convincing. He states, “I went back to the CFO’s…If I could show you with your own data, exactly how this demographic shift is going to affect your long-term expense, would that be of interest…?”
O’Toole concludes by saying that almost unanimously, senior management embraced the idea of deeper engagement in their company 401(k) plan.
