More and more American workers depend on defined contribution plans to fund their retirement, but DC plan participants are not on track to sufficiently fund their goals, according to a new white paper from BNY Mellon.
DC plans, it said, have relied too much on retail investment solutions and limited access to alternative investments, have been unable to integrate automation and education and have inefficiently priced products and services.
Now, DC plan sponsors are adopting best practices of defined benefit plans as a way to increase the efficiency of their plans, according to the paper.
Their top priorities for improving current DC plan offerings are increasing the use of low-fee institutional vehicles, using alternative strategies and generating an income stream during retirement.
The paper reflects insights from a survey of 20 plan sponsors from Fortune 500 corporations with billions in DC assets; many have large DB plans.
The survey found that mega-market sponsors expected a 65% increase in use of alternatives to mutual fund vehicles. By 2020, 70% expected to use collective trust funds and 65% separately managed accounts, both of which have costs or fee advantages over mutual funds.
Thirty-five percent of sponsors said they would reduce their reliance on mutual funds.
According to the report, a number of sponsors are turning to white-labeled options as a way to simplify their investment offering and reduce fees. These private funds typically have lower costs than mutual funds, it said.
White-labeling involves grouping various investment managers, asset classes or investment styles under a descriptive name that describes the strategy.
DC sponsors also plan to rely more on alternative investment strategies in the expectation of getting closer to DB plans’ level of returns, with 30% planning to add hedge funds or liquid alternative funds by 2020.