Rethinking the Risk of Defined Contribution Plans

This article explores the feasibility of each of these suggestions, and separately analyzes the impact of the following in defined contribution plans: (1) inadequate fiduciary rules; (2) unfavorable investment performance; (3) lack of insurance protection; and (4) inadequate funding practices. This article concludes that the impact of these risks is extremely disparate between defined benefit plans and defined contribution plans. Part II shows that inadequate fiduciary rules threaten the success of ERISA as the use of defined contribution plans as primary savings vehicles escalates. Part III demonstrates a need for insurance protection against unfavorable investment performance in defined contribution plans, and proposes an insurance model to resolve existing inequities among participants in the two types of plans.

Part IV determines that past service credits in defined benefit plans and defined contribution plans are indistinguishable; consequently, at a minimum, the portion of the expected retirement benefit attributable to past service warrants pre-funding, or some level of insurance protection.