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Retirement Planning > Saving for Retirement

ACLI-backed paper supports income guarantees in DC plans

By Warren S. Hersch

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The federal government should incentivize employers to make part-time and recently hired workers eligible to participate in their retirement plans, according to a new white paper.

The report, “Building Retirement Security through Defined Contribution Plans,” authored by Professors Jeffrey Brown and Scott Weisbenner of the University of Illlinois at Urbana-Champaign, was written under the auspices of the American Council of Life Insurers (ACLI). The paper supports the view that private defined contribution (DC) plans can provide a secure retirement for current and future generations of workers.

“[To] fully reach its potential, policymakers, plan sponsors, the retirement industry, and individuals need to work together to extend retirement saving and income opportunities to more households,” the report states. “Furthermore, we need to ‘change the conversation’ to be more focused on retirement outcomes.

“Rather than focusing defined contribution plans as a tool for wealth accumulation, we need to move public policy, plan design and communication toward treating defined contribution plans as a path to guaranteed income.”

To that end, the paper’s authors recommend increasing DC plan rates via automatic enrollment and automatic escalation, either of which can boost savings rates. To help people better manage their assets in retirement, the authors also suggest eliminating regulations that discourage employers from incorporating into the plans guaranteed retirement income options, including annuities.

The paper also makes these recommendations for improving risk management of DC plans:

  • Encourage the expanded use of qualified default investment alternatives (QDIAs) that provide automatic diversification and automatic rebalancing;
  • Encourage continued innovation in the QDIA space to provide further diversification to plan participants, including such asset classes as agriculture, real estate and commodities;
  • Encourage plan sponsors to incorporate guaranteed life income into their in-plan distribution options and to report participant accounts in terms of retirement income rather than solely as an account balance.

The paper adds that while only 17 percent of plan participants currently provide an annuity option, 56 percent say they think they would use such an option when they retire if it were provided to them.

“We would also support the creation of a safe harbor that provides plan sponsors with a clear way to meet their fiduciary obligation when providing retirement income options,” the report states.

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