While the UK defined contribution (DC) system is newer and smaller than its US counterpart, it seems that our cousins overseas have learned valuable lessons and is now something that US DC plans should be emulating according to the Chair of Invesco’s DC Institute. Leveraging multiple employer plans (MEPs), auto enrollment, professionally managed investments and alternative funds, the UK 401k (DC scheme) is experiencing great success.
Features of the UK 401k system include:
- MEPS – Smaller employers can join state sponsored MEPs like NEST (National Employer Savings Trust), People’s Pension and others which now account for 33% of UK DC members adding 1.2 million in 2015.
- Auto Enroll – With a 10% opt out rate for mandatory auto enrollment and 56% of plans with lower than 5%, the phased approach seems to be working with lower rates than expected.
- Auto Escalate – The minimum contributions will cap at 8% in 2019 with 3% contributed by employers and 5% by employees including 1% tax relief.
- Default Investments – Ninety percent of members in the UK DC plans use default investments compared to 68% in the US with 86% of UK investors in lifestyle or risk based funds – target date funds are just catching on.
- Alternative Funds – UK plans, especially larger ones, are leveraging alternative investments including direct real estate accounting for 24% of assets in default funds.
- Expenses – Fees are limited to .75% including administrative fees or revenue sharing.
- Withdrawals – Loans are not permitted with strict hardship requirements.
All in, the UK DC system looks a lot like DB plans while learning the behavior finance lessons which spawned the ideal plan in the US. Other than requiring a 3% employer contribution, adopting the UK schemes will cost US companies very little with many plans already matching that amount. Good lessons to take to senior management to help move US plans to the next level.
