“It feels like a long time since defined contribution [DC] was the soft fiduciary option,” says Collie, chief research strategist, Americas Institutional, for Russell Investments. Defined contribution plans were once the easy choice, relative to defined benefit (DB) plans. But that time is long over.
The world is changing, and there’s more change to come, Collie says. Today, 69% of corporations offer defined contribution plans exclusively, making them the primary retirement savings vehicle for the majority of Americans, but plan sponsors could be doing more to keep pace with today’s retirement challenges.
Plan sponsors can get practical advice about creating a best-in-class plan that improves retirement outcomes for participants and also meets fiduciary obligations in Russell’s new fiduciary guide, “A Defined Contribution Retirement Plan Handbook.”
Collie says it feels strange to look back and realize that Section 401(k) of the Internal Revenue Code (IRC) was originally an add-in to the Revenue Act of 1978. According to one of the principal authors of that section, he says, it was only included as part of the political horse-trading needed to gain support for an act primarily designed to cut taxes. “It was not expected to change the world,” Collie says.
It is no wonder, then, he says, that the defined contribution world increasingly moves toward the institutional investment model. Features such as automatic enrollment and target-date funds (TDFs) are now used to make the 401(k) plan more effective as the primary retirement vehicle for a huge section of the American work force.
Tax considerations remain central for the future, Collie says. “Now, the question is how the government can find additional sources of revenue,” he says. Another emphasis will continue to be how to make sure defined contribution plans generate a lifetime of income after retirement, rather than simply acting as tax-efficient savings vehicles before it.
Russell’s defined contribution team continues to push plan sponsors to aim for excellence, according to Collie. The prevailing attitude at Russell is that plan sponsors who merely aim for “good enough” are in fact already falling short, he says. Collie describes the handbook as an overview of the current status of the key issues that affect DC plans.
The handbook’s three sections—plan governance, investment considerations and retirement income—are designed to help plan officials gain a more complete understanding of the issues and options important to consider in designing and implementing defined contribution plans focused more directly on boosting retirement income for plan participants. The handbook examines trends shaping the DC landscape and plan design, and provides insights into plan fees and default investment considerations, asset class menus, and recommendations for how to think about income solutions.
“Now is the time for plan sponsors to take an even more active role in helping address America’s retirement savings needs,” says Josh Cohen, managing director and head of institutional defined contribution at Russell. “Some simple improvements can move a plan toward excellence, and this handbook offers clear recommendations on what success ultimately looks like and a path to get there.”
Cohen says the handbook is ideal for committee members, investment and human resources (HR) staff, and advisers interested in learning more about different aspects of defined contribution plans. The guide was compiled by three experts in defined contribution at Russell: Mark Teborek, Kevin Knowles and Michelle Rappa.
The well-known challenges of too few workers enrolling in the plans, and too little being saved by those who do, should compel plan sponsors to do more to encourage participation, says Rappa, director of business growth for defined contribution. “Effectively engaging participants requires not only good communication but also the right plan design attributes,” she says. “Auto-enrollment and auto-escalation of contributions, robust investment defaults, as well as re-enrollment and mapping to default investments, are must-have features for plans that want to positively influence retirement outcomes.”
According to Cohen, the complexities of setting a strategy, implementing and administering a plan, and complying with the Employee Retirement Income Security Act (ERISA) and other Department of Labor (DOL) regulations and requirements are stretching plan sponsors to the point where they must make strategic decisions about what DC plan responsibilities to retain in-house and what to delegate to specialist fiduciaries. “Sponsors must clearly understand who is responsible for governing the plan, who is responsible for implementation and who is responsible for reviewing to make sure things go smoothly,” he says. “The handbook details what a continual governance process looks like and makes the case that governance often requires that plans seek out and delegate aspects of their plan management to third-party experts as needed.”
“A Defined Contribution Retirement Plan Handbook” is available through Russell’s website.