DC Plans 3.0 Will Really be Tailored to Individual Situations

In a new report, “Shifts for the DC Organisation of Tomorrow,” Willis Towers Watson’s Thinking Ahead Institute outlines what it calls defined contribution (DC) plans version 3.0. The findings are based on surveys and interviews of 10 leading companies on four different continents with a median size of $80 billion in assets serving a base of 900,000 participants.

“Target-date funds (TDFs) offered what was the beginning of customization for defined contribution plans, by taking into account an individual’s age,” Bob Collie, head of research at the Thinking Ahead Institute, tells PLANSPONSOR. “As technology advances to address each individual’s situation, then DC plans will begin to really be tailored to individual situations.”

The new research also asserts that the DC version 2.0 is now emerging, with a focus on retirement income solutions. Collie says version 3.0 will be customized by “hyper-customization and integrated whole-of-life wealth management” that takes into account all of a person’s savings.

“The need for change has been clear for a long time,” Collie says. “Even 10 years ago, we talked of a version 2.0 of DC that was built around the purpose of providing income throughout retirement. It’s only recently that real progress has started on this front. But momentum has been building, and we expect things to develop quickly from here.”

The institute also expects DC plans to embrace the growth of master trusts and other multiple-employer platforms.

Collie adds: “DC has become the world’s dominant retirement savings vehicle, and work is needed if it will live up to the responsibilities of this role. The next few years will be pivotal ones in the development of retirement plans all around the world.”

The report says that “post-retirement income arrangements are primitive” and that there is a need for “longevity tail insurance.”

The Thinking Ahead Institute also expects that the need for retirement plan providers to keep up with technological developments will squeeze out small players.

The institute says there is a real problem with the coverage gap in the U.S., with roughly half the private-sector workforce not participating in an employment-sponsored retirement plan. People are also not saving enough, and there is a need for plans with automatic enrollment to increase the deferrals. Plans also need to address leakage, as people move from one job to another, the institute says.

Ninety-three percent of the respondents to the survey and interviews said their organizations make effective use of their investment managers. Collie says he believes the reason they did not express concerns about their investment lineups is because there has historically been so much emphasis on the investments offered in a plan.

With the growth of master trusts and multiple employer plans, the institute believes more retirement plan sponsors will be able to outsource many functions of their plans. “This development will offer employers more choice in what role they’d like to play in the provision of retirement benefits,” the institute says in its report. “It will, most likely, become easier to outsource not only merely investment or administrative functions, but also the key fiduciary role of operating a plan.”

Collie also believes that because technology will enable customization for each participant, the pendulum will move away from set-it-and-forget TDFs and automatic enrollment to obtaining more personal information from each participant—resulting in more engaged participants.