Towers Perrin has released a paper entitled Are DC Plans Really Risk-Free for Employers?. It challenges a fundamental assumption that defined contribution plans are risk-free for the sponsoring employers.

“Historically, putting a fixed amount of money into a pension plan on a scheduled basis, without having to guarantee a specific payout, was considered low risk for the employer,” says Minaz Lalani, Towers Perrin consultant and co-author of the report TP principal Ian Genno.

“In the 1990s, many employees embraced these DC plans, which allow individual control and responsibility for setting one’s own investment strategy, effectively transferring the investment risk from the employer to the individual plan member. From the employer perspective, however, we believe defined contribution retirement and savings plans should be managed like any other aspect of business operations, with appropriate governance and risk management procedures.”

Rising stock markets throughout the 1990s resulted in satisfied plan members and few challenges to employers. However, stock market declines have affected all market-related investments including defined contribution plans are no exception. Regulators are considering how to protect the members of these plans.

The Towers Perrin paper identifies four categories of risk that firms need to manage to ensure they meet their business objectives and human resource needs as well as fulfill their fiduciary responsibilities.

“The traditional view is that employees bear the investment risk in capital accumulation plans. While this is clearly still true, we believe that employers may also be able to influence the degree of risk that employees are exposed to,” said Genno.

“While employees are more financially aware today than ever before, their financial literacy may not be sufficient. Employers may be able to step in and help fill the gap.”