Beyond the Obligation: Transforming Retirement Spend Into Enterprise Value

Ernie Caballero

Companies seeking to attract and retain a top workforce, help employees achieve improved retirement outcomes and manage personnel planning are making retirement capital-allocation decisions that are increasingly under a microscope. Utilizing defined contribution plan or defined benefit plan options in isolation has not fully delivered those benefits while maintaining balance sheet discipline, flexibility, cash flow predictability and governance control.

A new solution may be the answer: a hybrid DC/DB model, combining strengths of both types of plans while turning a company’s retirement spend into an active lever for capital efficiency, workforce resilience and organizational performance.

The Failure of the Binary Choice

For decades, the U.S. retirement landscape has been constrained by a false dichotomy between DC and DB models. This binary choice forces a compromise that undermines enterprise value and participant security:

• The DC Limitation: While maximizing portability and simplicity, DC plans shift the entire burden of retirement security to the participant. Individuals are forced into the roles of chief investment officer and actuary, a shift that has resulted in under-saving and a critical lack of lifetime-income mechanisms.
• The DB Burden: Legacy DB plans, while effective at delivering predictable outcomes, have become untenable for many sponsors. Interest-rate volatility and asset-liability mismatches transformed these plans into unfavorable balance sheet liabilities that modern organizations no longer want to justify.

Migrating from DB to DC was a tactical cost-containment response, not a permanent structural solution. Because DC plans were designed for accumulation, rather than decumulation, sponsors are now moving beyond this binary to solve for institutional stability and individual retirement readiness.

A Potential Solution: The ‘Enhanced DC’ Framework

We believe the future of retirement design lies in a hybrid architecture called the “Enhanced DC” framework. This model transcends the traditional binary choice by intentionally integrating a traditional DC plan with improved benefits and a market-based cash balance plan. MBCB plans are hybrid pension plans that give employees a notional account balance tied to the investment returns of the plan’s professionally managed assets, rather than to a fixed rate.

The MBCB functions as a modern DB structure that economically mirrors a professionally managed, portable, account-based plan. By linking the crediting rate to actual returns on the plan’s assets (subject to a preservation-of-capital rule), MBCB eliminates the asset-liability mismatch that plagues traditional pensions.

Crucially, sponsors could realize greater potential benefits at no additional contribution based on an optimization driven by two structural forces accelerating this shift:

• Institutional Investment Alpha: Accessing sophisticated asset classes typically unavailable in DC menus; and
• Institutionally Priced Retirement Income: Lifetime income has become a design imperative that DC plans were never built to support. Providing lifetime income streams—which generally pay out approximately 20% more than the retail or DC-only market—optimizes retirement outcomes without increasing sponsor contribution or spend. (Retirement income from an MBCB, generally paid from plan assets, is cheaper than retirement income products purchased from an insurer on the open market.)

Harmonizing Institutional Power with Personalization

We believe the Enhanced DC framework captures the best of the DB and DC worlds by pairing the strengths of DC and MBCB structures into a single, integrated experience.

The MBCB plan adds:

• Institutional Portfolio Construction, which provides access to private and alternative markets and economic exposure. We estimate that a 15% allocation to diversified private markets could improve long-term performance by 50 basis points, generating 20% to 30% more lifetime income for participants;
• Expanded Contribution Capacity and Enhanced Compensation Deferrals: While DC plans are capped at $72,000 in total annual additions under current IRS limits, MBCB contributions are predictable, governed by DB limits. For older participants, this can exceed $250,000 per year; and
• Professional Risk Management: Participants will gain large-pool longevity economics and efficient in-plan lifetime-income conversion. Employers will receive institutional-grade investment governance with stronger fiduciary posture and reduced litigation risk. The MBCB plan will also provide balance-sheet and earnings discipline with controlled risk.

This framework harmonizes institutional power with personalization, modernizing retirement benefits. By unifying these structures, participants benefit from an integrated investment strategy and a streamlined user experience. This can also provide a high-performance lever for top talent and greater accumulation potential, alongside constructing a personalized investment strategy. The flexible, DC-like component complements the institutional core of the MBCB, optimizing the total portfolio across the efficient frontier—all while preserving balance-sheet discipline, cash flow predictability, flexibility, cultural alignment and institutional-grade governance control for the employer.

The Takeaway: The Future Retirement Framework Lies Beyond the Binary

DC assets have surpassed $14 trillion, while the gap in retirement readiness persists. This discrepancy is catalyzing a fundamental convergence of retirement models, placing the onus on plan sponsors to reconcile institutional scale with individual outcomes.

Integrating DB and DC structures is no longer a theoretical evolution, but an active transformation. Enhanced DC represents a next-generation framework tailored for today’s complex employment and investment landscape. By integrating the flexibility, portability and administrative simplicity of DC plans with the institutional efficiency of MBCB models, organizations can deliver greater potential for participant security and accumulation to meet different employee goals.

The mandate for plan sponsors is clear: Design for effectiveness, govern for optimization and measure for results. By linking a company’s spending on retirement benefits to the outcomes that matter—employee readiness and retention, workforce resilience, and capital efficiency—organizations can transform a legacy obligation into a strategic engine of enterprise value. We believe the future of retirement will be enhanced.

Ernie Caballero is a managing director at Goldman Sachs Asset Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.