October 23, 2012
--- Defined contribution (DC) plans could improve participants' retirement outcomes by adopting practices of defined benefit (DB) plans and
other institutional investors. ---
“The Path Forward: Importing Winning DB Strategies into DC
Plans,” the third installment of Northern Trust’s research series on the future
of DC plans, pinpoints best practices from investment models used by pension
plans, endowments and foundations, and identifies how they can be implemented
by DC plans to improve retirement outcomes for participants.
Executing a more disciplined investment approach, designing
more efficient fee structures and encouraging participants to maintain their
assets in the plan structure after retirement would all help to improve results
in DC plans, Northern Trust found, but the survey also identified hurdles to
implementing these practices, including resistance to perceived changes to
benefits and concerns over fiduciary liability.
Nearly 70% of plan sponsors interviewed are optimistic that
DC plans are capable of providing sufficient retirement income to working
Americans. However, respondents also believe that DC plans could improve their
chances of participant success by importing winning strategies from
institutional investors, including:
Approach: Establish a streamlined investment menu that includes simplified
pre-mixed default options, access to alternatives and cost effective
Structure: Minimize overall participant cost by utilizing institutional
investment vehicles, maximizing the plan scale, conducting regular fee
benchmarking and reducing or eliminating revenue sharing.
Dedicate appropriate resources and attention in proportion to DC assets
invested, create efficient decision-making process and be mindful of
Enhance the plan’s decumulation strategy by providing education about
distribution options, offering appropriate asset preservation and income
generating investment products, and maintaining an ongoing dialogue with
Maintain lifetime engagement with participants through personalized
communications clearly focused on specific outcomes.