DC Plans Important to Retirement Security

February 11, 2014 (PLANSPONSOR.com) – Defined contribution (DC) plans are an important part of the U.S. retirement system, says a research report.

“Building Retirement Security Through Defined Contribution Plans,” authored by Professors Jeffrey R. Brown and Scott J. Weisbenner from the University of Illinois at Urbana at Champaign, was written in cooperation with the American Council of Life Insurers. The report indicates that positive strides have been taken by DC plan sponsors in recent years, especially in the areas of increasing participation, providing more diversified portfolios and providing immediate eligibility to employees that are more likely to switch employers at various times throughout their career.

As the DC system has grown, say the authors of the report, it has evolved to better meet the needs of employers and participants. “Median employer plus employee contribution rates are now approximately 10% of income,” they say. “Additionally, the widespread use of life cycle and target-date funds as default investment options, as well as the decline in allocations to employer stock, has greatly improved the asset allocation of typical participants. As a result of these and other improvements, today’s defined contribution system is preparing millions of participants for a secure retirement.”

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The report addresses critics of the DC system who claim that defined benefit (DB) plans are a better retirement vehicle. “The good old days of the DB plan were not actually so good,” say the report’s authors, pointing out that prior to the protections offered by the Employee Retirement Income Security Act (ERISA), employee retirement benefits were “exposed to substantial funding risk and short-tenure workers often received no benefits at all.”

In addition, the report finds as a result of ERISA protections, many employers have found that providing a DB plan no longer passes “the cost-benefit test in light of a changing economic environment.”

As for improvements to the DC system, the authors recommend, “Policymakers and the employer community should work together to continue to build on the substantial progress already made regarding coverage, participation and contributions, as well as in the promotion of guaranteed retirement income and other retirement risk management practices.”

Other recommendations include improving incentives for employers to offer plans and making part-time and recently hired workers eligible to participate, as well as increasing employee contribution rates through automatic enrollment and automatic escalation plan features.

In terms of changes on a broader level, the report suggests that the aim of DC plans be refocused from simply accumulating wealth to “treating DC plans as a path to guaranteed retirement income.”

The full text of the report can be downloaded here.

Employee Ruckus Stops Change in 457 Plan Provider

February 11, 2014 (PLANSPONSOR.com) – The Village of Forest Park, Illinois, has retreated from moving employee 457 retirement plan accounts to a new provider.

The village council voted in December to move the accounts from longtime oversight by Nationwide Retirement Solutions to a new provider, AXA Equitable, according to the Forest Park Review. Forty-seven different Nationwide funds were slotted to disappear and be replaced with AXA funds with similar characteristics.

However, employees became upset when the new arrangement was announced in late January. Employees complained about the suddenness of the change and that the procedure for selecting a new provider was sloppy. The news report says 81 current employees invest in the funds, as well as 34 retirees.

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When asked in December about whether a bid process was used to select AXA for the turnover contract, Gillian said in an email: “The gentleman from AXA advisors made a presentation and on the benefits of the firm he represents over that of our current advisor. We reviewed his proposal and believe that AXA will provide more information and lower fees to those employees who use the service.”

According to the news report, Nationwide agent Brent Harpster said he’s gotten phone calls from angry employees asking if they could privately retain their accounts, some of which had been with Nationwide since June of 1980. The contract with AXA says the company will charge no asset charges, withdrawal charges or administrative charges for the first year. “If AXA has better investment returns, a higher fixed interest rate, and lower fees [than Nationwide], the employees will benefit by this change,” Harpster said.

Mayor Anthony Calderone also said he had been receiving complaints from employees about the switch. Calderone told the Review “the village is not making any change from Nationwide.” He also said the village “at this time” would not be adding AXA as a second provider.

However, the village still has a contract with AXA passed as an ordinance in December and signed by the mayor, giving AXA control of all 457 accounts except for the firefighters. It is unclear whether the village can cancel the contract or is on the hook to switch funds.

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