Redefining Defined Contribution Plans

In a new white paper, “Redefining DC Plans for the Future: Top 10 Updates to our DC Vocabulary for 2018,” Willis Towers Watson delves into the evolving meaning of 10 terms associated with defined contribution (DC) plans today.

Previously, “best practice plan design” referred to a DC plan that was a supplemental savings plan. Participants made modest contributions, with sponsors encouraging them to sign up for the plan by offering them a match. Today, DC plans are participants’ primary, or even their sole, retirement savings vehicle. Many DC plans are tailored for the needs of a company’s unique demographics, Willis Towers Watson says.

In the past, sponsors and advisers measured “plan success” by measuring participation, deferral rates and account balances. Today, the focus has shifted to outcomes and participants’ retirement readiness.

Sponsors and advisers used to assess “DC plan risk factors” in terms of compliance errors, piecemeal documentation, poor fund performance, excessive fees, nondiscrimination failures and employee lawsuits. Today, all of those factors still matter, as well as having a workforce unable to retire. Sponsors are also realizing that financial wellness programs are important to lower workers’ financial stress and raise their productivity.

In the past, employers focused on “participant inertia” by educating them about the importance of signing up for the plan, saving enough and allocating their portfolio appropriately. Today, employers now realize they can leverage that same inertia by automatically enrolling participants into their plan and auto-escalating their contributions.

“Participant communications” in the past have all been generic, mostly delivered as printed materials that were mailed. Today, basic communications have become much more customized to various demographic groups and are delivered via various channels.

“Group educational meetings” with a single message have been replaced with educational meetings designed for specific groups of participants, such as those approaching retirement.

“Off-the-shelf target-date funds” (TDFs) as the qualified default investment alternative (QDIA) have been replaced with various options, such as managed accounts or blended funds that also deliver retirement income. Some TDFs have even become customized.

“Participant investment decisions” used to be difficult, as sponsors offered many choices in their investment lineup, often confusing participants. Today’s investment menus are simplified and streamlined.

“Retirement plan investment committees” used to bear the fiduciary responsibility themselves. Today, many are turning to advisers to act as 3(21) or 3(38) fiduciaries.

Finally, “investment menus” used to offer a plethora of choices. Today, they have been pared down and many offer custom multi-manager options focused on participant retirement objectives.

Willis Towers Watson’s white paper can be downloaded here.