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‘Modern’ DC Plans Have Pension-Like Elements: Vanguard

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Employers are taking more of a responsibility in the defined contribution plans offered to their workers, a report issued Tuesday by Vanguard found. The survey, “Global Trends in DB and DC Plans,” found the modern DC plan is adopting some elements of defined pension plans to help participants prepare for a more secure retirement.

“The modern DC plan reflects innovation that is driving an evolution in the traditional DC plan structure to provide many of the best elements of both a DB plan and a DC plan. As a result, we expect better retirement outcomes for participants,” Steve Utkus, head of Vanguard’s Center for Retirement Research, said in a statement.

The survey was conducted in July and August 2014 among 90 multinational companies. Respondents administered plans in at least three countries.

Three-quarters of respondents said DC offers the ideal structure for retirement plans. Over 70% of respondents said they planned on increasing employer contributions over the next five years, some “dramatically.”

The report noted, however, that increased funding levels don’t help investors who make bad decisions, suggesting that will lead to increased adoption of target-date funds. TDFs are already the preferred default option, particularly in the U.S., where 75% of respondents said their default investment option was a standardized, off-the shelf TDF. Over half of all respondents agreed. Fourteen percent of total respondents said a custom TDF was their default, and 15% were using a customized lifestyle fund.

The default funds chosen by plan administrators tend to use a combination of active and passive investments (57%), according to the report.

“We were a bit surprised, frankly, that passive-only default funds did not emerge as more of a preference, as our experience suggests that more sponsors are recognizing the advantages that come with passive strategies, including lower costs and the elimination of manager risk from the outcome,” Utkus said in the statement. “In contrast to the survey results, the marketplace trend indicates that passive-only defaults will grow over time.”

The report identified other trends happening in global DC plans. Respondents were managing plans in at least three countries, and administrators are making an effort to centralize plan governance. The report identified greater pooling of efforts and assets, potential associated cost advantages and better risk management as the main benefits to centralized plan governance.

Local market rules and customs are limiting how quickly administrators can do so, the report found, but on average, 40% of firms plan to move to a more centrally governed plan in the next five years.

“Improving governance on a global basis takes time and requires healthy dialogue and the engagement of everyone involved. The exact steps an organization takes will vary based on its culture, strategic objectives and employee base,” according to the report.

The report found defined benefit plans are consuming more resources, time and effort than DC plans (58% versus 38%). As DC plans continue to take over as the preferred style of retirement plan, 63% of global plans say more of those resources will go to DC plans. Just 3% of respondents said they will spend less time and money on DC plans.

As focus has shifted away from DB plans, priorities have shifted from maximizing total returns to liability-driven investing, the report found, a trend Vanguard estimates will continue. Almost three-quarters of DB respondents said they prefer LDI strategies over total return strategies.

“The popularity of LDI investing is unsurprising given that the main concerns in managing and maintaining DB plans were pension risk (defined as the cost uncertainty and/or variability in the pension plan funding ratio) and the cost of the plan for the sponsor,” according to the report.

— Check out Gen X, Y Driving DC Contributions and Rollovers on ThinkAdvisor.


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