(May 12, 2014) — The evolving dynamics of the defined contribution (DC) industry point to room for improvement on the plan sponsors’ end to better meet participants’ retirement needs, Russell Investments has suggested.
According to its research, 69% of US corporations offer DC plans to their employees, but the average participation rate has lingered at 76% for the past few years. And even those who are enrolled in the program are not contributing enough, the asset management firm stated, with the average pre-tax contribution lagging at 7%.
“Now is the time for plan sponsors to take an even more active role in helping address America’s retirement savings needs,” said Josh Cohen, Russell’s head of institutional DC. “Some simple improvements can move a plan toward excellence.”
The firm’s new handbook outlined a variety of ways for sponsors to help plan participants understand their needs and formulate a plan that would be most appropriate for their individual situations.
“Effectively engaging participants requires not only good communication, but also the right plan design attributes,” said Michelle Rappa, Russell’s director of business growth for DC. “Auto-enrollment and auto-escalation of contributions, robust investment defaults, as well as re-enrollment and mapping to default investments are must-have features for plans who want to positively influence retirement outcomes.”
Russell found target date funds to continue to grow as a major player in the DC space for participants relying on sponsors to design their retirement plans. Target-date assets alone have been projected to reach over $1.7 trillion by 2018. Of all DC participants, 91% were enrolled in target-dates as of 2012.
For participants who want to monitor their asset allocation, the plan sponsor needs to develop a “well-constructed core menu that represents a diversity of risk and return choices,” Russell said. “We recommend that plan sponsors streamline their investment menus, but then think about multi-manager solutions as well, where high-caliber specialists can work alongside each other to obtain optimal exposures.”
In addition, plan sponsors should understand participants’ objectives and fee budgets for each asset class to offer an appropriate mix of active and passive strategies, Russell argued.
Looking further into the future of DC plans, plan sponsors may need to begin developing lifetime income strategies. According to the report, the majority of plan sponsors interested in providing retirement income had over $1 billion in assets. Though not yet prevalent, in-plan annuity solutions could replace closed or frozen defined benefit plans, attract and retain talent pre-retirement, and retain participant assets in the plan post-retirement, the firm argued.
“Regulatory support for in-plan guarantees is increasing,” Russell said.
Since December 2008, the US Department of Labor and the Treasury Department has issued regulations and provided guidance to educate plan sponsors and participants on annuities. Today, the guidance on lifetime income disclosures is under review for both departments to conduct surveys on how plan providers could offer lifetime income in DC plans.
“The pace of change has not slowed down,” commented Bob Collie, Russell’s chief research strategist for Americas institutional division. “Just as the operation of a DC plan today would be in many ways unfamiliar to a time-traveling fiduciary from 10 years ago, so today’s fiduciaries need to be prepared for fundamental changes over the next 10.”
Related Content: How to Build the Best DC Plan (the JP Morgan Way), DC: The Next Frontier for Fiduciary Management