In our collective search for ways to offer retirement income security while maintaining contribution stability, jointly-sponsored pension plans (JSPPs), target benefit plans (TBPs) and shared risk plans (SRPs) have much to offer.
Combining a defined contribution approach to funding with a defined benefit approach to benefits addresses many of the perceived shortcomings of both types of plans. Plan sponsors aren’t on the hook to fund deficits alone and plan members don’t have to worry about outliving their savings.
Each of these three plan designs also removes the burden of investment choice that has plagued defined contribution plan members who might lack the skill and/or interest to make smart decisions.
But that doesn’t mean that these plans are any less challenging to communicate than DB or DC pension plans are. If anything, communicating effectively around JSPPs, TBPs and SRPs is even more difficult.
On the surface, these plans may appear to place fewer demands on plan members. But each one of these plans, to a certain degree, allows for the possibility of benefit reductions – past, future or both. It’s what distinguishes them from DB plans, and it has a huge impact on member communication.
Given that individual plan members have no say in when or how reductions (or improvements, for that matter) are made, it’s essential that:
- Plan leadership is credible and trusted by plan members;
- The plan operates in an environment of full transparency; and
- Members have a clear line of sight between the plan as an entity and their individual pension entitlement.
Members need to be fully informed of both the benefits and the risks. They need to know how the plan is governed and how decisions are made. They also need to be aware of the key factors that determine the plan’s funding health and which could trigger a change (positive or negative) in benefits – things like investment returns, interest rates, shifts in member demographics, contribution levels, and even the cost of the plan provisions. This requires ongoing member education that goes well beyond an annual pension statement or annual plan report.
This may seem like an impossible task, especially in the face of financial literacy deficits and member apathy. But multi-employer plans, which are also TBPs – including plans in the construction trades, the healthcare/personal care sector and transportation – have been successfully operating, and communicating with their members, for decades.
JSPPs, TBPs and SRPs shouldn’t underestimate their members’ ability to grasp key concepts that have a direct impact on their benefits. At the same time, taking a page from the multi-employer experience, they need to understand that building this level of knowledge and awareness won’t happen overnight.
It’s an ongoing process that requires a substantial investment of time and resources. It’s also the cornerstone of a successful, sustainable plan.