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The Next Evolution of Defined Contribution Plans

Aug 14, 2020

Key Takeaways

  • A major challenge for workers is generating a sustainable amount of lifetime income in retirement.
  • The SECURE Act mandates that DC plans provide plan participants with projections of future retirement income.
  • The next generation of DC plans has the potential to help workers meet their retirement income challenges.

 

One of today’s greatest financial wellness challenges for workers is generating an adequate and sustainable amount of lifetime income in retirement. Defined contribution plans primarily focus on helping participants accumulate retirement savings, not converting those savings into a steady stream of lifetime income. This can leave workers vulnerable to a wide array of risks once managed by defined benefit plans including longevity risk, market risk, inflation risk, interest rate risk, and conversion risk.

In two new white papers, From Saving to Income: The Next Evolution of Defined Contribution Plans   PDF opens in a new window and America’s Workers Need a Next-Generation DC Plan More Than Ever   PDF opens in a new window, we look at today’s defined contribution plans such as 401(k)s, and how they are likely to evolve.

  • The first generation of 401(k) plans relied on employees to voluntarily enroll in them, determine the amount they would like to save, and choose their own investments, usually from an extensive menu of choices.
  • Version 2.0 of DC plans demonstrated that incorporating defaults into plans, such as automatic enrollment and default investment options, is effective in getting workers to save and invest.
  • With DC plan version 3.0, plan sponsors will evolve their plans to have participants focus on a retirement outcome, namely helping participants reach their individual retirement income goal. Accordingly, plan sponsors will add personalization to their plan design toolkit.

 

 

It’s clear today that DC plans, for all their successes, still fall short of helping participants with preserving assets in their pre-retirement years and generating lifetime income once they’ve stopped working. The economic fallout from the COVID-19 pandemic will likely compound these challenges. Policymakers in Washington have already indicated their support for a third evolution in DC Plans with the overwhelming passage of the SECURE Act into law. Among other things, the act mandates that DC plans provide plan participants with individualized projections of how much retirement income their DC account balances will generate in the future.

By embracing new technologies, customization opportunities, and risk-mitigation solutions, DC plans have the potential to help workers meet their retirement income challenges.

 

For Compliance Use Only:1030530-00004-00

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