Defined contribution (DC) plans are being created by more multiemployer plans for their participants, raising a critical question for Taft-Hartley plan trustees: Should they manage the plan investments themselves? Or should they permit participants to direct investments in their own individual accounts?
There is no right or wrong answer to the question of trustee-directed vs. participant-directed DC plans. Both approaches have pros and cons (See the table). This article reviews some factors that trustees should consider.
In a trustee-directed DC plan, trustees are legally liable for the investment decisions they make just like they are in a defined benefit (DB) plan. But in a DB plan, participant benefits are not tied to investment performance, so participants may not be as concerned about how well or poorly the investments in the trust perform. Absent severe underfunding or another failure of the fund, DB participants should get the pensions they've earned.
However, in a DC plan, participants are more sensitive to investment performance--over the long term and the short term--because their benefits are equal to the value of their accounts. If participants in a trustee-directed plan are unhappy with the performance of their individual accounts and believe the trustees made imprudent investment decisions, they can potentially sue the trustees, claiming a breach of fiduciary responsibility.
In the case of a participant-directed DC plan, however, a provision of the Employee Retirement Income Security Act (ERISA) known as Section 404(c) could protect DC plan fiduciaries from liability, should participants' own investment choices cause poor performance.
In general, to take advantage of Section 404(c), the plan must provide at least three investment options with different risk-and-return characteristics and permit participants to switch among them at least quarterly. Plan officials also must give participants certain information about the investments, including fees and performance. Even though 404(c) protects fiduciaries when participants make their own investment decisions, fiduciaries remain responsible for selecting and monitoring the investment options on the plan menu. But regardless of whether DC plan investments are managed by fiduciaries or directed by participants, fiduciaries should engage in a prudent process to determine that investment and recordkeeping fees are reasonable. In recent years, DC plan participants have filed several lawsuits against fiduciaries of large corporate DC plans claiming, among other things, that those fees were unreasonably high.