DC Plans Adopt DB Characteristics

They are adopting more lower-cost and alternative investment vehicles.

Defined contribution (DC) plans continue to adopt more of the strategies of defined benefit (DB) plans, according to a report from BNY Mellon, “The DC Plan of the Future,” which is based on interviews with 20 plan sponsors at Fortune 500 U.S. corporations.

Specifically, DC plans are adopting more lower-cost investment vehicles, along with alternatives and income-generating products. Thirty-six percent of the respondents said they intend to make greater use of separate accounts, and 36% said they intend to decrease their use of mutual funds. One quarter (25%) plan to introduce white-label products that have lower costs than mutual funds. Fifty-five percent said providing retirement income is an important priority.

“Many of the principles and best practices of DB plans can be used to enhance the performance of today’s DC offerings,” says Dan Smith, BNY Mellon’s head of asset servicing for the Americas. “DB plans typically outperform DC plans, sometimes by as much as two percentage points per year. That’s an important motivator for DC retirement plans to offer asset classes their investors haven’t been able to access in the past. By adding alternatives to their plan, sponsors can provide participants with downside or inflation protection.”

Smith adds that many DC participants are investing 3% to 6% of their salaries, in line with what DB plans invest, but that they would be better off if they increased that to 10%.

The BNY Mellon report concludes: “Defined contribution plans have become a critical component for retirement provision across the U.S. They have made significant strides in terms of their evolution, but there remains work to be done if they are to improve retirement outcomes for the millions of Americans that they cover. It is incumbent on all plan sponsors to be able to gauge the impact of macro-industry trends on the operation of their plans.”

BNY Mellon’s report can be downloaded here.