Defined contribution, or DC, plan sponsors have done a good job getting employees to save for retirement in their 401(k), 403(b) and other plans. Features like auto-enrollment encourage saving and improve the odds that retirees will avoid a funding shortage. DC plans aren’t a retirement-savings panacea, however.
George Castineiras, senior vice president, distribution, Prudential Retirement, notes that savings vehicles like 401(k) accounts were never intended to be a retiree’s primary retirement plan.
“The 401(k) market was never intended to be a retirement plan – it was always a savings supplement,” he says. “And now with the shortcomings of defined benefit plans not being at the funding levels they need to be and Social Security being in question, what’s left is the 401(k). The 401(k) assets will become the predominant vehicle of choice in some way, shape, or form for most participants in the future.”
The ongoing bear market has revealed another problem with relying solely on DC plans.
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Plan participants generally are encouraged to invest some portion of their account balances for growth, usually in the form of stock funds. Although long-term investment results favor this approach, non-guaranteed investments expose employees to the sequence-returns risk during the years immediately surrounding their anticipated retirement date.
“People don’t really take the time to think about that when the markets are going well,” shares Castineiras. “Inertia sets in; most people are never prepared for it. You can talk about it until you’re blue in the face. But when it happens, it hits like a brick across your forehead, it gets everyone’s attention, and that’s what’s getting everyone’s attention right now.”
Plus, the decline in traditional defined benefit plan participation exacerbates the problem, since employees without pensions are more reliant on their DC balances, which they must manage to create a retirement-income stream.