When it comes to constructing the perfect defined contribution (DC) plan, sponsors and participants both might benefit by taking a page from the Rolling Stones’ famous line: “You can’t always get what you want, but…you get what you need.”
For nearly a decade we have been surveying plan participants and sponsors, and the latest data from our study indicates that employers and employees need two things: better structured DC plans and greater retirement confidence.
How can we give them what they need? By listening to what they want.
More than three-fourths (77%) of plan sponsors are keenly interested in increasing plan participation, according to our research. And most participants (67%) said the single most important feature they want from their DC plan is a steady income stream in retirement.
How do we get there?
The first road is through automation.
The data is pretty clear. DC plans that have automatic enrollment have higher participation and savings rates (read here for one of many such studies). So plans should make workers “opt out” if they don’t wish to participate and invest in the default. Plans should also offer automatic escalation, with contributions automatically increasing each year.
What the data is making even starker in recent years is that selecting a qualified default investment alternative (QDIA), such as a target-date or target-risk fund, might have the greatest impact on savings. The display below shows that from 2006 to 2010, young people (20s to 40s) have nearly doubled the percentage of their savings that are going into QDIAs. And within the next five years, QDIAs will likely account for the majority of all DC plan assets.
In addition, sponsors gain significant fiduciary safe harbor protection by using QDIAs—making the option a no-brainer.
But the default solves only half the problem.
Lifetime Income That People Want
Historically, incorporating a lifetime income solution within a DC plan has been a significant challenge.
Workers say they want lifetime income, but rarely choose to shift their retirement savings into an annuity. Our research shows that’s because most people hate to lose control of their money more than they like lifetime income.
And DC plans have been hesitant to provide lifetime income solutions because they’re worried that such services may create extra complexity and fiduciary risk.
In short, DC plans have not been successful in providing lifetime income to their participants. Yet.
This may have finally changed this summer when UTC, one of the country’s largest DC plans, launched a Lifetime Income Strategy (LIS) default option. LIS provides fiduciary safeguards, guaranteed income and a low cost multi-insurer structure that addresses many of the concerns that have deterred stakeholders in the past.
Could it be sponsors and participants finally have what they need?
“Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested¾including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.