Defined contribution plans are today the primary retirement planning vehicle for U.S. workers. Three key opportunities and challenges exist for plan sponsors and policymakers.
Shortfall in worker participation
Expect continued legislative, regulatory and sponsor initiatives aimed at increasing plan participation and expanding coverage.
4% - Median automatic default rate of pay for 401(k) plans1.
Opportunity Increase Savings
The average participant changes jobs every four years2, and the effect of job changes alone could lead to a final accumulation at retirement that is more than 40% less than that of a full-career employee3.
Opportunity Retain Savings
Percentage of U.S. workers not covered by workplace plans, in a working population of 126 million Americans (age 16 and over)4.
Opportunity Increase Coverage
Enhanced savings and retention
Expect continued, incremental regulator and sponsor innovations aimed at increasing savings and retaining participants in the system.
Expect modest steps toward a “lite” retirement solution (e.g., some form of auto-IRA and/or Open MEPs) for employees not currently covered by a plan.
Some larger plan sponsors may find the new “lite” retirement solutions more attractive than “traditional” ERISA retirement plans. Workers who lack a retirement plan will have greater access to one. Momentum is encouraging.
Inefficiency In Investments
Confusing array of investment options and a lack of fee transparency can make it difficult for workers to achieve retirement goals.
Average number of total investment options in 401(k) plans5.
Opportunity Improve Fund Menus
Proportion of DC plans’ assets allocated to target date funds as of 20176.
Opportunity Improve Asset Allocation
Surveyed Baby Boomers who believe they are not paying any fees for their retirement plan offerings (Average fees are 1.5%)8.
Opportunity More efficient, transparent Fee Structures
Partly cloudy — chance of thunderstorms
Improved Investment Efficiencies
Watch for mixed conditions. Expect broad consensus in favor of simplified investment menus and defaults, but deeper debate on fee structure.
Plan fiduciaries will be wise to ensure reasonable fees, with an emphasis on a reasonable fiduciary process, while preserving the quality of investment options in their plans.
Retirement Income Needs
Longer lives, market turbulence, and increased investment responsibilities are combining to create income uncertainties for future retirees.
Fewer than half of today’s workers have calculated their income needs as part of planning for retirement11.
Opportunity Improve Income Awareness
Gain in U.S. average life expectancy from 2000-2017 means people will need more income to maintain longer retirement12.
Opportunity Improve Access To Income Products
Multiple agencies are lining up in support of expanding use of annuities in 401(k) plans.13
Opportunity Update annuity rules
Cloudy with fog in low-lying areas
Some improvement in income focus
Watch for more participant education on retirement readiness. Widespread adoption of in-plan income solutions face several obstacles: sponsor concern about fiduciary risk; limited consensus on solutions; ongoing participant aversion to the use of annuity products; and the high cost of annuitization in the current, long-run low interest rate environment.
Participants will continue to seek out greater income security but further actions are needed by sponsors, providers and regulators to improve access to, and adoption of, solutions that manage both investment and longevity risks.
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1 Source: “2017 Defined Contribution Trends, 10th Anniversary Edition” Callan 2017
2 Source: Bureau of Labor Statistics
3 Assuming typical defaults of employer match of 50 cents for each dollar contributed by the participant up to 6% and automatic contribution escalation of 1% per year up to a 10% cap. Source: PSCA 59th Annual Survey, 2017
4 Source: Employee Benefits in the United States – March 2017” Bureau of Labor Statistics. Civilian, private industry and state and local government, and Labor Force Statistics from the Current Population Survey, last modified January 19, 2018. www.bls.gov
5 Source: Defined Contribution Benchmarking Survey, 2017 Edition, Deloitte
6 Source: PSCA 60th Annual Survey of Profit Sharing and 401(k) Plans, 2017
7 Source: Cerulli Research Associates' 2016 U.S. Defined Contribution Distribution
8 Source: “How to find out what you’re paying for your retirement account” Time.com, October 2014
9 Source: American Benefits Council data as of September 2017
10 Source: Summit Strategies Group, “Mitigating Litigation Risk in Defined Contribution Plans” December 2017
11 Source “The 2017 Retirement Confidence Survey” Employee Benefit Research Institute and Greenwald & Associates, March 2017
12 Source: Society of Actuaries, MP-2017 mortality tables
13 Source: Treasury issues guidance to encourage annuities,” US Department of the Treasury, October 2104
The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.
This material is not an offer, solicitation or recommendation to purchase any security.
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First Use: March 2018