DC Plans in US Need to Cover More Workers, TIAA Finds

A study of global pension systems also suggests that workers should be required to join 401(k)s and other retirement programs.

Workplace retirement plans have a lot of money: Defined contribution assets in the U.S. stood at $11.1 trillion at the end of the year’s first quarter, up 5.3% percent from year-end 2023, per the Investment Company Institute.

Still, according to a retirement security study by the TIAA Institute, the research arm of TIAA, the U.S. retirement system is spotty for workers. The reason: There is no universal enrollment in employer-provided plans, as is often the case elsewhere.

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Globally, the average retiree will spend roughly two decades in retirement, double the tenure from 50 years ago. In the U.S., since Social Security began 90 years ago, life expectancy has risen 17 years.

“In our vision for the future, all U.S. workers are automatically enrolled into a robust, cost-efficient retirement plan,” commented Bret Hester, general counsel and head of TIAA’s government relations and public policy group, in the report. “Workers who don’t choose their own investments would be defaulted into a well-designed investment solution that can easily be converted into a guaranteed income stream or other payout option at retirement.”

In the U.S., defined contributions plans are now predominant in the private sector, although participation is not often mandatory and not all include employer matching contributions. “Because DC plans do not automatically convert retirement savings into a guaranteed income stream, and most participants do not voluntarily purchase annuities, the only source of guaranteed lifetime income for most retirees is now Social Security,” the report noted.

Meanwhile, the number of retired Americans is larger than a half-century ago, and so is the time spent in retirement, as longevity has risen. In 1974, when the Employee Retirement Income Security Act, or ERISA, was enacted, the average male worker retired at 68.5 and had 9.6 years in retirement. In 2024, the average worker retires at age 65.2 and spends 18 years in retirement.

The study covered Australia, Canada, the Netherlands, Singapore, Sweden, the U.K and the U.S. The U.S., the U.K., Canada and Australia have individual choice systems for workplace retirement plans, in which participants manage their own investments and risks, including longevity risk, which means some may opt not to participate in their employer’s plan, if one is offered.

The Netherlands, Singapore and Sweden have collectively managed plans, in which employers require workers to participate, limit individual choice and share risk across all participants. All have a supplement in government-run, compulsory plans, such as Social Security in the U.S.

In the U.S., strong laws ensure transparency in 401(k) plans and the like. The report highlighted this, evidently to underscore that these were trustworthy products.

Some 54% of workers have access to employer-sponsored plans. “Policymakers have already made efforts to expand retirement plan coverage, although a federal mandate for employers to offer a plan has yet to gain approval,” the study pointed out.

But the lack of required participation has a downside. As the report stated, “the low rate of annuitization at retirement implies that many participants are missing out on risk sharing that could potentially boost their income in retirement.”

The report warned that the “voluntary, employer-centric nature of the workplace system also leads to variation in the quality of workplace retirement plans.”

ERISA Council Signals More Work Needed for Retirement Income Products in QDIA

The council agrees on the need to balance innovation with regulatory guidance.

The Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council, on Thursday held the final discussion in this week’s series centered on retirement income products and their place within qualified default investment alternatives.

Members debated the complexities of integrating lifetime income options into retirement plans and the broader implications for plan sponsors and participants amid the changing retirement landscape. One member expressed concern that participants that are defaulted into target date solutions that include an income component may pay for a benefit that they do not put to use. 

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In response,  Alice Palmer, the vice president and retirement plan service chief counsel for the Lincoln Financial Group, highlighted testimony from executives at RTX Corp., which implemented an in-plan guaranteed income solution for employees. Those executives drew attention to the comparability of retirement income target date product performance with that of S&P Index TDFs.

Palmer reminded the council that the actuaries at RTX highlighted the comparison because fund managers that are managing target date solutions with a guaranteed income component—in part because of the guarantee—are able to more aggressively allocate the other target date assets closer to retirement. Consequently, she said, net performance can be very similar to that of a standard index TD fund.  

“Whether your money is in a Vanguard fund, or whether your money is in target date solution with a guaranteed income component, what that translates to, if liquidated early or in retirement, depending on the product, can be equivalent,” she said.

Beth Halberstadt, a senior partner in and the U.S. defined contribution investment leader at Aon, echoed Palmer’s concerns, agreeing that there is a significant opportunity for more guidance on retirement and lifetime income options within qualified plans. She stressed that the current regulatory framework, particularly Section 404(c) of ERISA, does not provide detailed guidance on how fiduciaries should assess or select these products.

“When we think about the rules that we have today, 404(c) is pretty high level,” Halberstadt said. “It doesn’t go into telling fiduciaries how to assess, how to pick, how to select.”

However, Halberstadt cautioned the group against letting perfection hinder progress, encouraging incremental steps toward improving available guidance. She also called for a balanced approach that fosters creativity while mitigating litigation risks.

“We know we don’t want to stifle innovation,” she says. “We’re already struggling in the DC space with innovation and litigation and trying to strike that right balance.”

Another key voice, Holly Verdeyen, a partner in and the U.S. defined contribution leader at Mercer, raised questions about the council’s focus. She noted that much of the testimony and discussion centered on the lifetime income component, despite the council’s original mandate to examine QDIAs as a whole.

Verdeyen emphasized the importance of determining how much of the final report should address the current state of QDIAs, suggesting that the conversation may have drifted too far into lifetime income products. Halberstadt agreed, but noted that foundational reports, such as those from Morningstar and Vanguard, could help address the gaps in testimony and provide a more complete picture.

In its future work, the council intends to further evaluate how lifetime income products can be integrated into QDIAs and how these decisions will impact plan sponsors’ fiduciary responsibilities. It will continue to focus on balancing innovation with the need for clear guidance, ensuring that retirees’ financial security is maintained across various product offerings, according to concluding statements from the advisory made Thursday.

Update: This story has been updated with additional commentary for context regarding TDFs with retirement income components.

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