What responsibility do plan sponsors hold in defined benefit hybrid plans?

In defined benefit hybrid plans, plan sponsors are tasked with managing the investment of plan assets and are responsible for bearing the investment risk. This obligation stems from the nature of these plans, which are designed to offer a guaranteed benefit to participants upon retirement, based on a formula that typically considers factors such as salary and years of service.

Because the promise of a specific benefit amount is made to participants, the plan sponsors must ensure that the investments grow sufficiently to meet these future obligations. This means they must take an active role in selecting and managing the investment portfolio and are accountable for any shortfalls in returns that could jeopardize the ability to meet promised benefits. As a result, the investment risk lies with the plan sponsors rather than with participants, who may benefit from a more predictable benefit structure compared to defined contribution plans where participants commonly bear the investment risk.

While it is true that participants may have some influence over the investment choices to a certain extent in some hybrid plans, the fundamental responsibility and risk remain with the plan sponsors. This clarifies the essential role they play in ensuring the financial stability of the retirement benefits promised to employees.