How is a defined contribution plan different from a DB plan from an IPS perspective?

Question

AcadiFi · Accepted Answer

Under a defined contribution (DC) plan the participant bears the investment risk. The sponsor's obligation ends when the contribution is made. So the IPS shifts from liability-matching to **menu design and default-option prudence**.

**Key differences vs. DB**:

1. **Risk bearer**: participant, not sponsor.
2. **Return objective**: participant-specific — the sponsor cannot set one return target. The IPS governs the *menu* and *defaults*.
3. **Risk tolerance**: ranges across participants. Default options (typically target-date funds) must suit an 'average' participant.
4. **Time horizon**: each participant's own; plan horizon is the aggregate.
5. **Liquidity**: must allow participant withdrawals per plan rules.
6. **Legal**: ERISA fiduciary duty for US plans; sponsor must prudently select investment options and monitor fees.
7. **Unique**: participant education, auto-enrollment, employer match design.

A plan sponsor named Director Sofia Reinholt builds the menu: a QDIA target-date fund, a core line-up (3-5 index funds across asset classes), an active complement, a stable-value option, and possibly a brokerage window. Fee level, glide path shape, and diversification are the board's fiduciary foci.

**From the exam angle**:

- There's no 'surplus' or 'funded ratio' for DC because there's no liability.
- Default-option TDFs concentrate the bulk of participant assets, so TDF governance has become the focal issue.
- DC plans often transfer longevity risk to participants — they can outlive their assets. Annuitization options are an emerging IPS topic.

Compared to DB, the sponsor's risk management shifts from investment risk to litigation risk (did we pick prudent options at reasonable fees?). The Moench-style 'prudent process' language dominates fiduciary documentation.

How is a defined contribution plan different from a DB plan from an IPS perspective?

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