An atmosphere of change is brewing for defined contribution plans, particularly in U.S. legislative and regulatory circles. Three key issues are at the leading edge of these changes.
Shortfall in Worker Participation
Expect continued legislation aimed at stronger plan participation and broader access for workers not currently covered by plans.
Workers not covered by workplace plans, in a working population of 148 million Americans.1
Opportunity Increase Coverage
Typical allocation of pay used as default for most auto-enrollment features in 401(k) plans.2
Opportunity Increase Savings
The chance of a worker achieving 80% replacement income is reduced by this margin, due to job changes, premature cash-outs, and penalties.3
Opportunity Retain Savings
Expect modest steps toward a new fundamental structure for providing retirement benefits to employees through non-employer sponsored plans.
Plan sponsors may find the new structures more attractive than what is currently available. 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) plans.4
Opportunity Improve Fund Menus
Proportion of DC plans’ asset under management made up of target date products.5
Opportunity Improve Asset Allocation
Surveyed employees (ages 50-68) who believe they are not paying any fees for their retirement plan offerings. (Average fees are 1.5%.)6
Opportunity Better Fee Structures
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Improved Investment Efficiencies
Watch for mixed conditions. Expect broad consensus in favor of simplified investment menus and defaults, but deeper debate on fee structures.
Plan sponsors will be wise to ensure reasonable fees 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 retirement.8
Opportunity Improve Income Awareness
Average gain in life expectancy during past 20 years means people will need more income to sustain longer retirement.10
Opportunity Improve Access To Income Products
Multiple agencies are lining up in support of expanding use of annuities in 401(k) plans.11
Opportunity Update Regulations
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Improved Income Focus
Watch for more participant education on retirement readiness. Widespread adoption of in-plan income solutions will come slowly due to limited consensus on solutions.
Participants will continue to seek out greater income security but must find better ways to manage both investment and longevity risks.
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1 “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013,” EBRI, October 2014. “The Employment Situation — March 2015,” Bureau of Labor Statistics, March 2015.
2 Source: “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans,” BrightScope/ICI DC Plan Profile, December 2014.
3 Source: “The Impact of “Leakage” on 401(k) Accumulations,” EBRI, June 2014.
4 Source: “2014 Universe Benchmarks Measuring Employee Savings and Investing Behavior in Defined Contribution Plans,” AON, 2014.
5 Source: “TDFs in 401(k)s stymie diversification,” BenefitsPro, March 2015.
6 Source: “Nearly Half Of Americans Surveyed Falsely Think They Pay Zero Retirement Investment Fees,” AYTM.com, September 2014.
7 Source: “Finding, and Battling, Hidden Costs of 401(k) Plans,” New York Times, November 2014.
8 Source: “2014 RCS Fact Sheet #6 Preparing For Retirement In America,” Employee Benefit Research Institute and Greenwald & Associates, 2014.
9 Source: “Bipartisan Lifetime Income Disclosure Legislation Introduced in Senate,” American Benefits Council, May 2015.
10 “Global Life Expectancy Increases by About Six Years,” Wall Street Journal, December 2014.
11 Source: “Treasury Issues Guidance to Encourage Annuities,” U.S. Department of the Treasury, October 2014.
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.
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First Use: May 2015