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Retirement Planning > Retirement Investing

Modern-day 401(k) plan emerging

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The defined contribution plan is evolving globally, as companies increasingly move toward a hybrid of DC and some of the elements of defined benefit plans. 

So say the results of the Vanguard survey, “Global Trends in DB and DC Plans,” which also found that DC plans are emerging as the predominant retirement plan structure not just in the U.S., but around the world. 

Vanguard said that employers – in their quest to develop the “next generation” retirement plan – are being more active in pursuing better investment outcomes for employees. They’re also being more aggressive about fee transparency, which is helping to boost the number of low-cost investment options available for retirement plans.

The survey identified four trends influencing the evolution of DC plans. 

The first is an expected increase in employer contributions, with 71 percent of respondents indicating that they expect to boost, either dramatically or somewhat, employer contributions to their DC plans. 

The second trend is an increasing reliance on target-date funds, with 66 percent of respondents preferring off-the-shelf TDFs as the default option in their plans and another 13 percent using custom TDFs. But that’s more of a U.S. trend, because TDFs are not as much in favor in other countries, where only 30 percent of firms are using them. Structural and regulatory differences outside the U.S. have meant that, despite respondents’ avowed preference for either off-the-shelf or custom TDFs, they haven’t been adopted anywhere else nearly as quickly. 

Third is the use of a combination of active and passive investment default options. Most respondents (57 percent) prefer a mix of both active and passive in the default fund structure, while 38 percent prefer all-passive. Only 5 percent favor all-active funds. 

Fourth is the growing insistence on fee transparency, with 79 percent of respondents saying that is one of the most important factors in their choice of whether to use a bundled or unbundled approach. 

Other findings included an increasing shift to liability-driven investing, particularly among DB plan sponsors in Europe. Overall, 73 percent of organizations said they preferred LDI strategies rather than total-return strategies in the management of DB assets.

Steve Utkus, head of Vanguard’s Center for Retirement Research, sounded an upbeat note in light of the findings.

“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,” Utkus said. “As a result, we expect better retirement outcomes for participants.”

See also:

Treasury halts pension investment

Record sales of annuities may reflect larger retirement savings trend

The promise of longevity annuities


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