The paper says it is imperative to redefine DC plans to address their current limitations by incorporating three elements:
- Built-in risk protection to protect participants’ future retirement income against adverse markets in the years just before retirement, and to ensure that participants cannot exhaust their source of retirement income during retirement;
- Autopilot retirement planning that provides participants with an automated and pre-defined path from their first day of employment through their retirement; and
- Streamlined plan operations that automate and reduce the cost of plan administration and can make DC plans more affordable for small firms.
Regarding built-in risk protection, Prudential suggests DC plans should provide participants with two specific types of protection:
- Market downside protection that protects future retirement income from market declines – offered by new solutions which enable a participant to lock-in a future guaranteed level of annual retirement income based on the market value of their retirement assets several years before retirement; and
- Longevity protection that ensures a participant will have access to a steady stream of income during retirement, no matter how long the participant lives or how the markets perform – available from new solutions, such as income guarantees, as well as traditional products, such as immediate income annuities.
On its second point, Prudential says that in addition to automatically enrolling participants, automatically escalating their contributions over time, and defaulting participants into certain investment vehicles, redefined DC plans should extend autopilot features into an individual’s retirement years by automatically enrolling participants in protection features, such as products that generate a guaranteed stream of income from an individual’s DC assets during retirement.
Finally, Prudential notes that research has shown that plan sponsors value automation, and cost savings and greater efficiency are the most important reasons, followed by improved quality of information and error reduction. According to the paper, streamlining plan administration includes automatically enrolling participants, allowing participants to view accounts and conduct transactions online, providing advice and education online, facilitating seamless portability of accounts, and leveraging existing safe harbor guidelines enable sponsors to electronically process loan applications.
Incorporating these three elements within DC plans will not only ensure that employees participate in the plan and save enough, but also that their retirement income is protected from adverse markets and they cannot exhaust their assets during retirement, Prudential contends.
In addition, for sponsors, the redesign would build in risk protection that helps mitigate fiduciary risks during future market downturns, reduce the amount of resources that sponsors must invest in encouraging appropriate participant behavior, and lower costs and administrative overhead.
The white paper can be accessed here.