DC Plans Offer Advantages Over DB Plans

“In theory, a DC plan can cost the plan sponsor any amount (subject to IRS limits), but in practice, contribution levels are set to make DC plans cheaper for the sponsor,” Bob Collie, chief research strategist at Russell Investments, tells PLANSPONSOR. “On predictability, the DB plan cost to the sponsor is highly variable and unpredictable. One reason so much information needs to be supplied for DB plans is to allow investors to assess the possible impact on future company results. DC plan costs, by contrast, are stable and predictable.”

The Seattle-based Collie continues, “In terms of simplicity, DC plans are becoming more complex to run now that they have become the primary vehicle for private sector retirement and the regulatory spotlight has been turned on them. But they still remain far simpler to administer and manage, from a public disclosure standpoint, than a DB plan. For example, there’s no need to qualify comments about costs with statements like ‘depending on whether you mean true economic or accounting or contribution cost.’”

However, while the greater simplicity of DC plan administration is a benefit to plan sponsors, it should not deter them from making efforts to improve their plan, says Josh Cohen, managing director and head of institutional defined contribution business at Russell Investments.

“Today, the vast majority of American workers are completely reliant on their DC plans, plus Social Security, for retirement,” Cohen tells PLANSPONSOR. “This number will continue to rise. Two 2014 PBGC [Pension Benefit Guaranty Corporation] premium increases will lead to accelerated growth in plan size through 2016 as plan sponsors move to fully fund existing pensions and shift toward DC plans for new participants.”

“More than ever, this means that DC plans stand as the primary retirement savings vehicle for American workers. Yet plans face challenges, including insufficient participant saving rates, inadequate participation levels across the work force, and improper asset allocation selections,” says the Chicago-based Cohen. “These issues have already fueled talk of a retirement crisis, the Obama administration’s introduction of ‘myRA’ bonds, and the proposal of a few other pieces of legislation. Without the introduction of some straightforward plan improvements, including auto-enrollment, auto-escalation, and the shifting of assets into default portfolios, the drumbeat of intervention will only grow louder, and sponsors may find themselves relinquishing control of plans entirely.”

Plan sponsors can improve DC plan through a few clear and practical steps, explains Cohen.

First, he says, practical enhancements including auto-enrollment, auto-escalation and re-enrollment can help improve retirement outcomes for participants. “Auto-enrollment gets participants into the plan, auto-escalation can be used to get them to an appropriate savings rate, and re-enrollment into target date funds helps guide participants with poorly constructed portfolios into properly constructed portfolios. Auto features are a great way for plan sponsors to address poor participant investment and savings behavior.”

Second, Cohen says plan sponsors can move to offer a streamlined and simplified menu of fund options to plan participants. In some cases, this may mean unbundling investments from plan recordkeeping services or offering custom-built funds for participants. Cohen also points out that, for participants, selecting the right investment strategy is no easy task. The key for sponsors to ensure positive outcomes is to design an understandable menu that guides participants toward making appropriate choices.

Third, Cohen says, plan sponsors should work with their recordkeepers to make the DC plan focused on retirement income, not just asset accumulation. This means providing participants with statements that illustrate retirement income goals and determine if participants are on track to meet that goal so that they can better understand retirement readiness and set the right savings rate. “Participants who know where they stand in terms of their retirement readiness can make better decisions to improve their outcomes,” he says.

Cohen concludes that retirement plan excellence does not happen by accident. “It takes a process starting with the goal in mind. Taking these steps can move a plan from average to excellent.”