The Future of Defined Contribution Plans
By Patrick Ring
Retirement Section News, January 2024
Financial security in retirement is a prime concern especially for employees covered by defined contribution (DC) plans. Years ago, most of the attention given to DC plans was focused on building enough of a nest egg before retirement, i.e., the accumulation phase. As the workforce has aged, the attention has shifted to providing financial security after retirement, i.e., the decumulation phase. The following interview with Michelle Richter-Gordon provides a look at how DC participants feel about their financial security in retirement and suggests how retirement professionals can improve the financial security of retirees during the decumulation phase.
Patrick Ring (PR): What are some survey results showing how DC participants feel about their financial security in retirement?
Michelle Richter (MR): Understandably, given the combination of inflation and market volatility that retirement savers have recently been experiencing, confidence in retirement savings adequacy amongst American workers has dropped dramatically this year. According to the Employee Benefits Research Institute’s 2023 Retirement Confidence Survey, “the share of workers reporting that they feel either very or somewhat confident [about their financial security throughout their retirement] decreased significantly from 2022 (64 percent in 2023 versus 73 percent in 2022)—the lowest level since 2018.”
PR: What are some concerns of DC participants?
MR: According to MetLife’s 21st annual Employee Benefit Trends Study, 71% of U.S. employees are now concerned about outliving their retirement savings, and 55% of those employees surveyed say they expect to postpone their retirement due to their financial position. A stunning 55% of workers according to the same survey say they are living paycheck to paycheck, up from 43% in just one year. So, being able to save for retirement is a large and growing concern for most DC participants, and then from there, being able to confidently generate income for a longer life span than experienced by previous generations is very much on their minds.
PR: What tools are available for plan sponsors to improve the financial security of DC participants?
MR: Evolving financial wellness educational tools and services are in my view likely to be a material element to improve the savings equation.
For the decumulation phase during retirement, evaluation tools made available by the Institutional Retirement Income Council (IRIC), a nonprofit think tank that promotes income derived from DC plans, should prove helpful. These tools can be viewed online.
PR: What are some challenges facing retirement plan professionals for improving the financial security provided by DC plans? And what are opportunities for retirement plan professionals?
MR: I feel that the success of initiatives to improve retirement financial security will rely on plan advisers and consultants becoming income advocates. It is imperative for plan advisers competing with wealth managers for rollover business to become expert in nonguaranteed as well as guaranteed solutions to retain assets through retirement. When it comes to guaranteed retirement income solutions, according to a LIMRA study, 79% of those plans considering in-plan income do so through their plan advisor/consultant, so competing within the DC space for sponsor business will require plan advisors to hone their income expertise. For those who do choose this path, an article in PLANADVISOR magazine indicates that in-plan annuities is one area in which plan advisors can build themselves a competitive niche.
PR: What recent regulations have strengthened the financial security provided by DC plans?
MR: Very materially, the SECURE package of proposals paves a future-oriented path for in-plan income. SECURE 1.0 provides a clearer annuity safe harbor by relaxing fiduciary requirements related to plan annuities. We have not yet felt the full impact of this law change because of COVID delays, but retirement professionals have been actively evaluating how SECURE 1.0 can be used to broaden access to institutionally priced income products and services. For bigger plans, it can take two to three years to do a full scope Retirement Tier investigation—more info on Retirement Tier is available.
SECURE 2.0 then implemented scores of provisions better enabling automatic savings, improved access to savings, and several annuity-oriented provisions in a bipartisan package. So, we are discussing a high public policy priority to which all sides of the political spectrum want to contribute.
PR: What additional changes to regulations would you suggest to further strengthen retirement financial security for employees covered under DC plans.
MR: For DC plans, to shift the mindset from the accumulation phase to the decumulation phase, I have heard some IRIC member organizations suggest it would be helpful if regulations mandate plan sponsors to incorporate retirement income provisions in the plan document. The current DOL requirement for plan sponsors to show the estimated income provided by the asset balance at least annually on recordkeeping statements does not go far enough.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Michelle Richter-Gordon, AIF, is a co-founder of Annuity Research and Consulting, LLC; owner of MRG Advisors; and serves as the executive director of the Institutional Retirement Income Council. Michelle can be contacted at mrgadvisers@gmail.com.