The Markets September 25, 2014

Treasury Official Discusses Options for Improving DC Plans

The U.S. retirement plan landscape has moved from a defined benefit (DB) to a defined contribution (DC) approach, and now it is moving to an “undefined” contribution system, one Treasury official contends.
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Speaking to attendees of the Plan Sponsor Council of America (PSCA)’s 2014 Annual Conference, Mark Iwry, senior advisor to the Secretary of the Treasury, and deputy assistant secretary of Retirement and Health Policy at the U.S. Treasury, explained that, in the age of 401(k)s and 403(b)s, the contribution is actually a big unknown. It is whatever the participant decides to put into the plan, plus whatever is offered by the employer in the form of a matching payment. “We need to restructure the retirement system so that retirement income can be defined,” he said. “There are things that can be done without the government passing more regulations.”

Iwry noted that the DC retirement plan industry is moving toward automation, which is a good first step, but the industry needs to take a few more. He noted that when regulators suggested a 3% default automatic deferral, “we were not thinking that was right, we were thinking that was a good starting point.” Plan sponsors need to use more robust strategies, he recommended: Automatically enroll existing participants that are not contributing, start at a higher default deferral, automatically escalate participants’ deferral rates, and don’t stop at 6% or 10% of salary for deferrals.

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If plan sponsors are worried about bugging participants, who may complain that they keep having to opt out every year, Iwry advised re-enrolling employees every two or three years. In addition, plan sponsors can get a commitment from employees now to enroll at a future time—for example, elect now to begin deferring with the next pay raise.

He also pointed out that offering an employer matching contribution in the plan can help get more participants saving adequately. He recommended stretching the match formula to give participants an incentive to make larger contributions. 

Still, some employees may not be able to defer more. For those, Iwry reminded plan sponsors that they can front load the match—offer extra to a certain group of low-income employees.

Plan sponsors should make it easier for participants to think about the income goal, according to Iwry. “Putting projected retirement income on account statements reframes participants’ thinking,” he said. In addition, participants need to be educated about what Medicare covers and their need for long-term care.

Plan sponsors can think about putting employees’ accrued vacation or sick pay into a retirement plan instead of paying them the balance, Iwry suggested. They should consider whether the waiting period to get into the plan is too long, and perhaps let participants defer but have to wait to get a match, he added. “It depends on what is good for the company.”

Iwry pointed out that the focus on income is not about everyone buying annuities. Yet, he said, he does think individuals are under-annuitized. “It’s something plan sponsors and participants should consider.”

Data & Research September 25, 2014

Total Retirement Assets Reached $24 Trillion in Q2

Total U.S. retirement assets reached $24 trillion as of June 30, up 2.8% from $23.4 trillion measured on March 31.
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Retirement assets accounted for 36% of all household financial assets in the United States at the end of the second quarter of 2014, according to an analysis from the Investment Company Institute (ICI). The ICI’s breakdown of assets among different retirement plan types shows $2.0 trillion is currently held in annuity reserves; $5.1 trillion in government defined benefit (DB) plans; $3.2 trillion in private-sector DB plans; $6.6 trillion in defined contribution (DC) plans; and $7.2 trillion in individual retirement accounts (IRAs).

The ICI’s data shows annuity reserves have remained relatively constant, at about $2 trillion, since the end of the third quarter of 2013. IRA assets have grown by about $700 billion since that time, and DC assets experienced growth of around $600 million. Government and private DBs saw about $300 million and $200 million in growth since the end of Q3 2013, respectively.

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Looking specifically at the second quarter of 2014, assets in IRAs increased 3.3% from April through June. Defined contribution (DC) plan assets rose 3.6%, while government DB plans—including federal, state, and local government plans—climbed 1.4% between the end of March to the start of July. Private-sector DB plans grew at a slightly higher rate than public DBs during the second quarter of 2014, and annuity reserves outside of retirement accounts largely held steady.

On the DC plan front, $4.4 trillion of the $6.6 total was held in 401(k) accounts at the end of the second quarter of this year, up from $4.3 trillion at the start of the quarter. In addition to 401(k) plans, $941 billion was held in 403(b) plans, $255 billion in 457 plans, and $401 billion in the Federal Employees Retirement System’s Thrift Savings Plan.

An additional $555 billion was held in other types of private-sector DC plans at the end of Q2 2014, the ICI says, and mutual funds managed $3.7 trillion, or 56%, of assets held in all types of DC plans. IRA assets were less likely to be held by mutual funds, with 44%, or $3.1 trillion, invested through mutual funds.

In addition to retirement assets, data on total retirement entitlements have been added to ICI’s recurring reports, beginning with this quarter’s release. Retirement entitlements include both retirement assets and the unfunded liabilities of DB plans. Under a DB plan, employees accrue benefits to which they are legally entitled and which represent assets to U.S. households and liabilities to plans, the ICI says. To the extent that plan assets are insufficient to cover accrued benefit entitlements, a DB plan has a claim on the plan sponsor.

As of June 30, 2014, U.S. total retirement entitlements were $27.1 trillion, including $24.0 trillion of retirement assets and another $3.1 trillion of unfunded liabilities. Including both retirement assets and unfunded liabilities, retirement entitlements accounted for 40% of the financial assets of all U.S. households at the end of June.

Unfunded liabilities are a larger issue for government DB plans than for private-sector DB plans. As of the end of the second quarter of 2014, unfunded liabilities were 1% of private-sector DB plan entitlements, 25% of state and local government DB plan entitlements, and 58% of federal DB plan entitlements.

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