Balance forward 401(k) plans may seem like an arcane topic for a Saturday morning even if you’re a pension person. But if you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one. Let me explain why.

Balance forward is an industry term given to those defined contribution plans, e.g., 401(k) and profit sharing, in which participants’ accounts are valued monthly, quarterly or annually. And after all the accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements. Most defined contribution plans, however, value participants’ accounts daily right after the markets close.

And I hadn’t given much thought to them lately thinking they were an anachronism. But the topic came up a recent conference of pension people that I attended, and there’s more of them out there than I thought. My brief skimming of one of the Form 5500 databases indicated that there are at least 70,000 401(k) plan not counting the profit sharing plans that allow participants to self-direct their accounts.

So what’s the problem you might ask. My visual metaphor up top is the answer. Like chess, balance forward retirement plans are a zero-sum game. That’s what the economists and game theorists call a situation or interaction in which one participant’s gain results from another participant’s loss. And in the context of the recent huge swings in the stock market, balance forward plans are a bigger zero-sum game than ever before.

Here why? Assume a participant in a balance forward plan with a $50,000 account balance as of December 31. The participant receives a distribution for $50,000 on March 1. But between January 1 and the distribution date, the plan has lost 20%. Thus, the plan – which is to say – all the remaining participants eat the $10,000 loss.

But now let’s assume that same participant receives the same $50,000 distribution. But instead of the plan suffering a market loss, it increased by 20%. Now all the remaining participants in the plan share in the $10,000 gain.

Now that’s fair, isn’t it?