The more things change, the more things stay the same. As the retirement landscape shifts from defined benefit (DP) plans to defined contribution (DC) plans, the industry is realizing that what participants need is income replacement, a hallmark of the defined benefit plan. In a recent article on PIOnline a panel of distinguished industry professionals weighed-in on the subject of income replacement as the challenge for DC plans.
The trend from DB plans towards DC plans is well-documented and not difficult to understand. DC plans shift the retirement savings burden from the plan sponsor to the participant, along with a lot of the costs and liabilities. However, DC plans like a 401k and 403b were not designed (in their current state) to be stand-alone retirement plans nor focus on income replacement. DC plans were originally conceived as a supplemental retirement plan.
Now that DC plans have become the primary retirement savings vehicle, the industry is fast learning they need to figure out how to make them behave, and look like traditional DB plans. It’s a mixed-up world and the stakes could not be higher for plan participants. Any way you look at it, a retirement plan needs to focus on the outcome and the objectives…replacing income and savings.
It used to be that the percentage of participation or the percentage of salary saved were considered plan objectives. But while these are still useful metrics, the shift to outcomes has at the same time changed plan sponsors’ views on how best to achieve success. “We see better approaches to measuring success in DC plans,” says Greg Jenkins, Senior Director and Chair of Invesco’s Defined Contribution Institute. “For many years, I don’t think plan sponsors were sure about how to measure their plan’s effectiveness. Now the industry is moving toward using using a percentage of replacement income as a performance measure. If DC plans are to replace DB plans, then they really need to replace income. And record-keepers are getting better at helping plan sponsors look at those metrics.”
Many of the panelists in the discussion suggest that a move towards managed funds and fewer core menu choices are part of the answer. Outsourcing menu design and limiting choices outside of the qualified default investment alternative (QDIA) are seen as preferred methods to positively affect outcomes.
