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How to Improve DC Plans for Better Retiree Outcomes: SEI

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Retirement plan sponsors don’t believe their employees will have enough to retire when they reach their early to mid-60s, and are worried about what that means for their firms, according to a survey by SEI. Furthermore, over half of sponsors surveyed said defined contribution plans weren’t designed to be a retiree’s primary source of income, so the overwhelming shift toward those types of plans requires changes to how they are designed.

The report, “Do DC Plans Need to Be Redesigned?” was released on Thursday, and is the first of a three-part series that will be published over the first half of 2016. SEI surveyed over 230 executives, about 20% of which are SEI clients. Plan sizes ranged from $25 million to over $5 billion.

Almost two-thirds of respondents said their DC plan will likely be workers’ primary source of income in retirement. Even among sponsors that offer both a DB and a DC plan (64% of sponsors, although only a quarter of those have active plans), over half believe the DC plan will be their workers’ primary source of retirement income.

However, 84% weren’t confident the plan could meet their workers’ retirement needs when they were ready to stop working.

Sponsors’ biggest concerns about the impact older workers would have on their firm were regarding health care. Over three-quarters said the increased health care costs of older employees who can’t afford to stop working would affect their firm. Those workers will also likely have higher salaries, a concern shared by 63% of sponsors.

Sponsors were also concerned about declining performance, among both older workers who wanted to retire but couldn’t afford it and younger workers who were frustrated by a lack of upward mobility within the firm. Sixty-four percent of plan sponsors were worried about losing those younger employees.

Recommendations for Redesign

Plan sponsors rated the quality of investments offered to participants as their top priority, SEI found, followed by performance, costs, simplicity for participants and protection from litigation.

Although the majority of plan sponsors said they weren’t confident about their plan participants’ retirement prospects, and the resulting impact on their firms, they’re placing responsibility for changing that squarely on the shoulders of their workers. More than half think participants should have savings in other types of plans, and 87% of sponsors think participants should contribute more to the DC plan. Just 20% think sponsors should match more, although the report noted that “as more DB plans are terminated, the expectation of plan sponsors’ contributions could potentially change.”

The survey found two-thirds of plan sponsors offer more than 11 core menu options in their lineup, not including target-date funds. Almost a quarter offer more than 16 funds. Furthermore, 43% said they were planning on adding more asset classes to the lineup in the next 12 months, and 91% are increasing investor education over the next 12 months.

“Industry reports have consistently suggested that participation rates decrease relative to a high number of funds in a lineup,” according to the report. “While education is unquestionably a critical focus area, it could be argued that offering a concise, well-defined set of investment options is also a priority.”

SEI also found most sponsors who offer both a DB and a DC plan use different money manager for each. That’s not just because most pension plans are closed to new participants; 77% of the admittedly small group of sponsors with an active pension plan (26%) don’t offer DC participants access to the same money managers as DB participants.

Another suggestion to improve DC plans was to unbundle asset management from recordkeeping. “While recordkeeper funds are still very prevalent in plan lineups, an unbundling of asset management and recordkeeping appears to be underway to some extent,” according to the report.

Almost two-thirds of sponsors said separating asset management and recordkeeping was a good idea, and most already use non-proprietary single manager or multimanager funds in their investment lineup. However, 59% still use proprietary target-date or core funds, and just 16% said they’re likely to unbundle services in the next year.

— Read How Can Employers Help ‘Generation DC’? on ThinkAdvisor. 


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