Institutionalizing a DC Plan Improves Outcome

By institutionalizing their defined contribution (DC) plans, plan sponsors can give their participants better retirement outcomes, a paper contends.

According to “Institutionalizing DC Plans: A Starting Point for Addressing Fiduciary Issues,” from the Defined Contribution Institutional Investment Association (DCIIA), institutionalizing a DC plan can also result in better fiduciary and risk management profiles for plan sponsors and fiduciaries.

“In the simplest possible terms, institutionalizing a defined contribution plan is about designing and structuring the plan with a focus on promoting positive outcome for the plan participants,” Lew Minsky, executive director of DCIIA, told PLANSPONSOR. The paper explains institutionalization as “a broad outcome-oriented mindset that applies beyond investment options and proposed a hierarchy of institutionalization levels for DC plans that included governance, funding, investment structure, engagement and education, and distribution and decumulation.”

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The paper builds upon material from a 2011 DCIIA paper, but discusses each hierarchy from a fiduciary perspective, said Minsky. “By doing this, the paper provides plan sponsors and their advisers issues to consider and actions to implement in order to develop a plan that delivers positives outcomes for participants and minimizes fiduciary risk for plan sponsors and other plan fiduciaries. It is an actionable and detailed, step-by-step guide to designing and managing a plan, which shows that you can manage fiduciary risk and deliver positive outcomes. It is our hope that plan sponsor and advisers will use this framework in managing their plans, which will ultimately lead to improved outcomes for participants.”

While the paper talks about a number of actions and processes that plan sponsors should consider, said Minsky, the key message is that these elements are part of an overall process that will benefit both plan sponsors and participants.

Some of the steps recommended by the paper include:

  • Governance – Determine the plan process, document plan decisions, and update plan and governance documents;
  • Funding – Plan sponsors should ask questions such as why they are sponsoring the plan, how they are maximizing the plan’s effectiveness and how they are structuring the plan for the best participation and contribution levels. To that end, the paper recommended steps such as automatic plan features and determining appropriate deferral rates;
  • Investment Structure – Conduct an investment structure review, change the investment menu to reflect diversification or to simplify choices into tiers, consider the level of investment assistance needed, update trust agreements, examine QDIA and re-enrollment issues, and research investment options;
  • Engagement and Education – Provide targeted communications to participants; and
  • Distribution and Decumulation – Review and develop a retirement income solutions strategy.

More information about the DCIIA paper can be found here.

Early Retirement Forced on Some Workers

Many employees had to retire before they planned, a survey found.

According to LIMRA Retirement Research, for nearly half (49%) of retirees surveyed, the date of their retirement was dictated by factors out of their control. Factors such as health issues (17%), job loss due to layoff or an employer buyout (14%) and negative work conditions (7%) were cited as the most common reasons behind retirees leaving the work force earlier than planned.

Just 45% of those polled said they retired when they had planned, and only 6% retired later than they had planned.

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Retiring earlier than planned can have significant long-term consequences, LIMRA noted. When someone is forced to retire early it could seriously affect their standard of living in retirement. In addition to the loss of a regular paycheck, early retirement also affects employer-supplied benefits such as health care coverage and retirement contributions.

In many cases, retirement is forced on people who are actually preretirees, said LIMRA. Several years younger than a typical retiree, a preretiree may not be eligible for options such as Social Security benefits or a reverse mortgage. They need to make financial decisions immediately that they would have ideally made later.

Advisers who recommend to their clients steady systematic savings throughout one’s career can help them mitigate some of the risk, LIMRA suggests. Because no one can predict retirement dates with perfect accuracy, early planning and preparation makes it less painful when someone is forced to leave the work force earlier than planned.

Research from LIMRA was based on 5,296 consumers, which included 1,533 retirees, 1,391 preretirees (age 55 and older, and not retired), 955 Late Boomers (ages 45 to 54, and not retired) and 1,417 from Generation X and Generation Y (younger than age 45, and not retired).

A chart containing a breakdown of timing and reasons for retirement can be found here.

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