Corporate defined contribution in 2017: so many questions…
In recent posts, we identified four big questions for corporate defined benefit (DB) plan sponsors in 2017, and one big question for the folks running endowment and foundation investment programs. When we turn our attention to defined contribution (DC), the list of questions runs on and on…
More points of view; more conflicting interests
One reason the DC picture is more complex is there are more points of view to consider. In DB, the direct impact of plan experience falls on the plan sponsor, so the most pressing questions (except when benefit security may be compromised) tend to be the sponsor’s. In DC, plan experience impacts the participant first. But participants are relatively powerless, so there’s a bigger role for regulators in directing the design of the system.
The fact that there are so many moving parts, each with their own particular set of incentives, leads to a complicated picture. If there is a single over-riding question for the DC system in 2017, it’s how to ensure that participants’ best interests are put at the core. That’s easier said than done: participants themselves have a clear incentive to act in their own best interest, but they often do not do so due to lack of information, lack of expertise, or inertia. Other parties – plan sponsors, regulators, even the class-action lawyers – are in theory serving plan participants; but when we look more closely at any of these, we quickly encounter the principal-agent problem and other barriers.
For plan sponsors, for example, the increasingly complex administrative backdrop and the frequent reports of class-action lawsuits tend to be the most pressing concerns, so finding ways to improve the effectiveness of the system can take a back seat. And, as I wrote in a recent post, “even though plan sponsors will have a big say in how quickly the system is transformed (and those who naturally lean to a more paternalistic attitude will take the lead), the driving force behind change is how rule-makers see the challenge, not the needs or opinions of plan sponsors”.
Meanwhile, the regulatory tone is likely to change as the new administration takes over. Retirement issues were not a major presidential campaign topic and are unlikely to face quite the same level of shake-up that the health care system seems set for. But with tax reform very much on the new administration’s agenda, there is likely to be an impact on the incentives around retirement plan provision. Another area attracting attention is the DOL’s conflict-of-interest/fiduciary rule: there is talk of delay and revision or even repeal. Beyond that, it’s difficult to say a lot at this point.
So many questions…
So what are some of the DC questions to be considered as we head into 2017? Here are a few:
How do we get low savers to put more into the plan? What are the key steps in minimizing the risk of lawsuits? How will the DOL’s fiduciary rule impact us? How do we improve diversification (including internationally)? What are the respective roles of active and passive management? How do we reduce leakage from the plan when people change jobs? What is the role of company stock? (And how should that be overseen?) Should participant education be broadened to include financial literacy/financial wellness? What to do about retirement income reporting? Should plans offer post-retirement solutions? Can target date funds be made to better fit individual circumstances? Should we think about outsourcing? How to improve coverage, especially for those working at small employers?
I could continue, but I think you get the point. There’s plenty there to keep us all busy in the New Year.