CFOs like DC plans over DB plans. Why? Less paperwork
By Paula Aven Gladych
Bob Collie, chief research strategist, Americas Institutional for Russell Investments, believes that chief financial officers prefer defined contribution plans over defined benefit plans because they mean less paperwork.
In a blog post this week, Collie talked about sifting through the annual reports of what he deems the $20 Billion Club, large U.S. corporations with worldwide defined benefit liabilities that exceed $20 billion. He pointed out that these companies used upwards of 10 pages of their 10-Ks talking about their DB plans, whereas only a sentence or two were dedicated to discussing their defined contribution plans. Most of these companies do have both types of plans.
“There is a breakdown of the expense associated with the plan, as well as analysis of the sources of gain and loss in the assets and liabilities and a description of the investments held in the plan. All of this is necessary because all of this is relevant to investors: the corporation is responsible for the balance of cost of the plan so the ups and downs of plan experience flow through to the economics of the corporation,” he said. “Every dollar of gain or loss in the plan means a dollar less or a dollar more that the corporation is going to have to put in to ensure the benefits get paid. All of the complications and uncertainty of the DB plan finances flow through into the plan sponsor’s financials.”
For DC plans, companies let investors know what they contributed to them and that’s it. It isn’t that these plans are small. On the contrary, he said, recent research shows that eight of the ten largest U.S. private-sector DC plan sponsors are companies that are in the $20 billion club.
“It is notable that of the $24 billion of contributions made to the primary U.S. DC plans of the $20 billion club in 2012, roughly 70 percent were employee contributions, not employer contributions. But the decision about how high to set the benefit is separate from the decision to go with DB or DC: it does not follow automatically from the nature of DC versus DB, being more a reflection of market norms and the choices made by sponsors as they switch from one to the other. It’s the simplicity of DC that has led to its taking over,” Collie said.
Originally published on BenefitsPro.com