Overhauling a DC Plan to Move the Needle

Investment provider SEI takes a look at the coming retirement crisis in its new report, “Do DC Plans Need to Be Redesigned?” The 2016 Defined Contribution Outlook especially scrutinizes what plan sponsors expect out of their plans.

More than half of plan sponsors agree that the original purpose and current use of DC plans do not match up. The findings clearly show that although companies continue to shift away from defined benefit (DB) plans to DC plans as the dominant retirement savings vehicle for participants, plan sponsors sometimes seem reluctant to tinker with plan design.  

Plan sponsors seem to be waking up to the fact that the DC plans may be inadequate to support employees in retirement, or even allow them to retire at all. According to SEI’s report, more than half of plan sponsors (57%) said the original intent of the DC plan was a supplementary savings vehicle for employees with access to a DB plan. And even more plan sponsors—nearly two-thirds (62%)—said they believe their employees’ primary source of retirement income will be the company DC plan, a rise from 57% of plan sponsors in a 2014 SEI report.

According to Frank Wilkinson, director of market research for SEI, the numbers show plan sponsors beginning to accept a changing landscape. “Nearly 84% of plan sponsors are not confident that their employees will have enough to retire at retirement age,” he tells PLANADVISER, “and 88% feel their business will be impacted in a negative way if people can’t retire.”

Wilkinson notes that in the wake of this recognition, plan sponsors can display either action or inertia. “We’ve seen bits and pieces [of action],” he says. “There’s some unbundling from the recordkeeper, some use of single-manager and multi-manager funds instead of recordkeeping funds.” SEI’s report shows nearly two-thirds of those surveyed (62%) believe it is a good idea to separate asset management services from recordkeeping.

Wilkinson says some plan sponsors fall into a category of more forward-thinking organizations trying to build the DC plan into a competitive differentiator that would allow people to retire at the right age with adequate assets. These plans share several characteristics: they tend to be larger plans with a paternalistic approach. “They want their employees to retire because they care,” he says.

Wilkinson describes these plans as outliers, and says they tend to be organizations with both DB and DC plans that now are looking to carry some of the aspects of the DB plan to the DC plan, making it a more sophisticated vehicle. It’s not a new trend: For some years, the industry and lawmakers have been attempting the “DB-ization” of DC plans. According to Wilkinson, these plans are scrutinizing the funds and aiming to position their employees to meet retirement goals.   

The first step for plan sponsors is to recognize the DC plan as the primary retirement vehicle, says Joel Lieb, director of defined contribution advice for the institutional group at SEI. The next is to set company-specific goals for the plan. Ojectives will vary by company and industry, Lieb says, but they tend to center on retirement. A construction company, for instance, might have an employee base that generally retires by age 55 instead of 65. Lieb says the goal would then be to structure the plan to reflect this earlier retirement age.  

The company will need to look at where they are invested today, assess employee deferral rates and perform a liability study, not unlike the way a DB plan looks to match assets and future liabilities. “Look at what the contributions are, so that you can ‘present-value’ those future payments,” Lieb says.

Another goal could be achieving income replacement, Lieb says, so a plan could be built around getting employees as close as possible to an 80% replacement ratio. Plans should capture their baseline in order to determine the gaps that might stand in the way of achieving plan goals. “Are low contribution rates causing a gap?” Lieb asks. “Are employees too conservative at one end of the spectrum or too aggressive at the other? Those things will come out in the analysis.” It’s time-consuming to accumulate all the data, but it tells an important story, he says.

After the analysis shows a plan its current status, Lieb says it’s easier to determine the path. Wilkinson says the process can help the plan sponsor sharpen the focus. Investments might need rethinking; perhaps the plan needs to make sure participants are using the target-date funds (TDFs) more appropriately.

While some plans still have a mindset where plan sponsors think of the DC plan as supplemental, Wilkinson says, more plans realize it’s the primary retirement vehicle, and they will need to put more resources into it: “The days of plan sponsor inactivity are over.”