While unpredictable factors can always arise that influence defined contribution (DC) plans, we expect industry-leading plan sponsors will align their efforts this year with several particular trends and themes. Based on these trends and themes, Capital Group’s retirement strategy team, identified five actions plan sponsors can take in 2018 to truly elevate their DC plans:
1) Define the plan’s objective. It’s surprising how many company retirement plans, even some larger ones, lack a clear and defined objective. DC plans used to be supplemental savings plans but now are primary retirement plans. Plan sponsors are starting to ask themselves questions such as:
- What is the fundamental objective of the plan?
- Who is the plan serving, and how will it help these employees accomplish their goals?
- Is this the sole retirement savings plan?
Objective-setting conversations should cover topics such as: the role of the DC plan and interaction with other benefit plans—such as a defined benefit (DB) plan—and in what way does the DC plan serve employees? For many plan sponsors, the DC plan is now their sole retirement plan. This may suggest an objective of: “A plan that serves employees throughout their working career and post-retirement to achieve and maintain a successful retirement.” A plan sponsor with a clearly defined objective for its DC plan will be better positioned to make all subsequent decisions.
2) Consider the options and impact of “auto” everything. More and more corporations are embracing automatic features, which shift employees into an appropriate retirement savings vehicle. But the trend toward automation, or even “DB-ization,” is just beginning. We expect more companies will adopt auto-features that push more participants into retirement savings plans, raise levels of contribution and guide employees to appropriate investment funds. If you’re not already auto-enrolling employees annually, it may be time to start. We expect more conversations about auto-escalation and investment re-enrollment as companies grow increasingly comfortable with a more proactive approach to DC plans.
3) Optimize investment structure. Simplification is a topic that has been gaining steam for a while but now seems to be catching on, especially among mega plans. The benefits of offering many investment options makes sense on the surface, but multiple options can cause indecision, which keeps employees from making good, or any, investment decisions for their retirement assets. In 2018, we believe we’ll see top-tier companies focusing on offering fewer, broader investment options, renaming options for ease of choice, and encouraging use of their qualified default investment alternative (QDIA). Simplification will be key.
4) Add a post-retirement tier. Ten thousand Baby Boomers retire every day in the U.S., according to Pew Research Center and the Social Security Administration (SSA). With so many new Boomers entering the retirement phase of investing each year, post-retirement income was a major industry theme last year. In 2018, expect to see companies take action, by adding a post-retirement tier to their investment structure. This tier would consist of options managed for withdrawals—i.e., investments that are liquid, portable and, importantly, understandable.
5) Measurement matters. With increased transparency in the industry and more information available to investors and employers than ever before, measuring the impact of your plan, today, is the key to its success. To elevate your DC plan in 2018, tie results to plan objectives, keep it simple and meaningful, and focus where you can have the most impact.
Toni Brown, CFA, senior vice president, Retirement Strategy, Capital Group
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