The American Academy of Actuaries thinks No, and I'm inclined to agree.

The Pension Protection Act generally requires defined benefit (DB) plans to pay a minimum contribution each year that is comprised of two parts, namely (1) the target normal cost and (2) a shortfall amortization. In simple terms, the first component covers the cost of additional benefit accruals and plan expenses for the upcoming year, and the second represents a seven-year mortgage of any debt (i.e., underfunding) that the plan has. A question currently being wrestled with by the IRS as they formalize guidance is whether or not plan expenses in the target normal cost should include investment related expenses or just administrative expenses.

Administrative expenses ordinarily include things like legal, accounting, and actuarial fees, termination insurance (PBGC premiums), and perhaps some administrative costs of the trustee, such as those involved with cutting checks to retirees or processing contributions. Investment-related expenses in this debate refer to the costs associated with professional management of the plan's portfolio of assets. Broken down to one of its most basic decision levels, the choice facing a plan sponsor with regard to investments is whether to pursue active or passive asset management. Passive management usually entails investing in index funds, which are designed to have little maintenance and low cost. Active management involves professional advisors seeking out opportunities in their niche markets in search of superior returns with various risk and reward characteristics. With passive management, the goal is to track the market. With active management, the goal is to beat the market.

There's nothing wrong with a sponsor deciding they want to try to beat the market. But forcing plan sponsors to contribute expected investment expenses for the upcoming year seems to contradict the very reason why one would choose active management over passive management, namely the expectation of higher returns over the long run. From a theoretical point of view, if active management truly cost more, then sponsors would reject it in favor of passive management. On the other hand, if active management actually works, then active sponsors should not be required to pay more up front than passive sponsors, only to recover the higher expected returns in the future.

Two sponsors with plans that are identical in every way should really have the same annual contribution requirement. The amount the IRS wants them to contribute in the upcoming year should not involve looking at their investment strategies. Let the battle between passive and active management returns play out over time. To the extent that one beats the other, the gains and losses will be amortized in an orderly fashion anyway.