It may be that the demise of the defined benefit DB plan is likely to be recorded as having occurred in 2016. There are a few seminal issues (not all good) within the retirement industry that are universally accepted as 2016 comes to a close. 2017 promises to be a watershed year for changes in the retirement industry. There is a new party in power in Washington, with Wilbur Ross, an investor, former banker and industry turnaround expert set to be Treasury Secretary. This appointment may be enough to telegraph change in ideology, but the industry is virtually bursting from internal pressures as well.
THE NEED FOR CHANGE CANNOT BE IGNORED ANY LONGER
The changes come at pivotal time as the industry is undergoing fundamental changes. Some of those include: 1) the slow demise of the defined benefit plan (DB) has begun to accelerate as each day plans are frozen or closed. 2) The successor to the DB plan is the defined contribution (DC) plan. 3) DC plans are woefully inadequate to accommodate the retirement needs of American workers. 4) Regulation has threatened to force an industry restructuring. At this point, it is becoming clear that these issues are inexorably bound together.
Taking a look at the declining DB business, Vanguard has conducted a survey of the DB industry to track changes in the macro environment.
Our results for the third survey reflect this challenging environment. A much larger percentage of corporate DB plans were closed or frozen in 2015 relative to our 2010 survey. In addition, many sponsors of these plans are looking for exit strategies. Our results show an increased focus on funding in order to minimize variable PBGC premiums, manage impact to sponsor company financials, and facilitate eventual plan termination. At the same time, most of those with open plans remain committed to maintaining their plan, but these sponsors continue to implement risk and cost management strategies.
REGULATION AND THE MARKETS
The response to economic hardship stemming from the 2008 housing market-induced crisis has been largely knee-jerk, over-regulation. A clear example of that is the new DOL Fiduciary rule which by its very structure was hastily constructed and pushed through the Labor Department in a bid to side-step congressional scrutiny. Not to say the rule is entirely without merit, but it is being viewed as a bit of an overreach and it is unclear whether it is doing more harm than good for participants. To be sure, regulation may be an impediment to the DC industry, but removing it won’t change the fact that DC plans are inadequate as a primary retirement savings vehicle.
If history is any guide, the lifting or relaxing of regulations is likely to have the effect of elevating and accelerating savings, and the equity markets, which will benefit are likely to rise. Add to that, the priority of the Trump administration to offer incentives to repatriate corporate profits into new infrastructure projects and the stage is set for a market-changing event. However, market timing is not the point, it’s the restructuring of the ecosystem that is important.
DC PLANS ARE FALLING SHORT
You hear it, you read about it, vendors promise to fix it and yet participants still cannot rely upon a DC plan alone in retirement. That is no surprise, DC plans like 401k were simply not designed as a primary savings plan for retirement. There are many reasons for that, including participant apathy, bad decision-making (impulsive and excessive buying and selling), and excessive fees and expenses that cut into growth and savings rates.
That needs to change in a very significant way and requires an overhaul, not a fix. Look for some very significant changes from the Trump Administration that are aimed at relaxing regulations and accelerating savings.
One caution is that while it is likely that the DC market will continue to expand, fees will come under tremendous pressure through market forces or by regulation. Fees are a major reason that DC plans under-perform their DB predecessor.
