Northern Trust looked to defined benefit plans for strategies to improve defined contribution plan outcomes in the third installment of its Path Forward series of DC plan research studies. The current study, “Importing Winning DB Strategies Into DC Plans,” was released in October.
Assets in defined contribution plans account for 57% of all retirement assets, Northern Trust found, and just 27% of companies have an active pension plan.
Northern Trust came to these conclusions by interviewing 48 plan sponsors in May and June. Together, those sponsors represent more than 1.5 million participants and $200 billion in assets. The firm also interviewed nine investment consulting firms for the report.
There are several benefits to DC plans adopting DB strategies, according to Northern Trust, though the sponsors interviewed largely agreed that efficiency of scale would be the best outcome for DC plans. Specific DB strategies that would benefit DC plans address:
Investment Approach. While the report acknowledges behavioral economists’ conclusion that too many investment options overwhelm participants, Northern Trust said that even in plans with limited options, there should be a mix of styles and assets classes to choose from.
Additionally, investment products should be examined to see if they’re appropriate for a plan. Common shortcomings in defined contribution plans are overexposure to company stock and underexposure to non-U.S. assets and failure on participants’ part to adjust their allocations as needed.
Another aspect of investment approach that could be improved is the search for better investment results. Easier said than done, but Northern Trust notes that products like professionally managed asset allocation funds can help lift some of the burden from unprepared participants. “When you combine the use of target retirement date funds as a (qualified default investment alternative) with automatic enrollment, you get a plan that gives participants an experience that in many ways resembles that of a traditional, professionally managed DB pension fund,” Jim Danaher, managing director of Northern Trust’s DC solutions group, said in the report.
Decumulation. The report found less than a third of sponsors encourage their participants to leave assets in the plan after they leave the company. Consultants, however, pointed out that higher asset levels help keep total plan costs down. Additionally, keeping their assets in the employer plan gives participants who leave the company but not the plan access to institutional pricing rather than retail pricing, as well as professional oversight.
While most sponsors say less than half of their participants pull their assets in a lump sum when they retire, 20% of sponsors say 70% of their participants take a lump-sum payout. Northern Trust argues that focusing on decumulation is just as important as accumulation.
Governance. Northern Trust argues that shifting resources to defined contribution plans is “among the most important steps plan sponsors can take toward ‘institutionalization’ of DC plans.” Resources should be roughly in proportion to the share of assets in the plan relative to the DB plan, if the company offers one.
Additionally, there should be a clear and streamlined decision making process that staff and sponsors make decisions quickly and efficiently with input from relevant parties.