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Northern Trust Study: ‘Winning Strategies’ To Improve Outcomes For Defined Contribution Plans

As defined contribution (DC) plans evolve into the primary retirement savings vehicle for American workers, a new study from Northern Trust suggests they could improve retirement outcomes for participants by adopting practices developed over decades by defined benefit plans and other institutional investors.

Executing a more disciplined investment approach, designing more efficient fee structures and encouraging participants to maintain their assets in the plan structure after retirement would all help to improve results in DC plans, Northern Trust found in a survey of prominent corporate retirement plan sponsors and investment consultants. But the survey also identified hurdles to implementing these practices, including resistance to perceived changes to benefits and concerns over fiduciary liability.

“Our research shows defined contribution plans need to shift their focus from simply accumulating assets to driving more successful outcomes in retirement security for participants,” said Jim Danaher, Managing Director of Defined Contribution Solutions at Northern Trust. “During the last decade, employers, industry providers and regulators have made significant improvements to DC plan design. But more work is needed to overcome challenges such as ensuring adequate funding, implementing appropriate investment diversification and offering effective ‘decumulation’ strategies for those who reach retirement in these plans.”

The Path Forward: Importing Winning DB Strategies into DC Plans , the third installment of Northern Trust's research series on the future of DC plans, pinpoints best practices from investment models used by pension plans, endowments and foundations and identifies how they can be implemented by DC plans to improve retirement outcomes for participants. The report is based on interviews with plan sponsors representing more than 1.5 million participants and almost $200 billion in assets, as well as leading investment consulting firms in the United States.

Interviews, which were conducted by research firm Greenwich Associates, found that nearly 70 percent of plan sponsors are optimistic that DC plans are capable of providing sufficient retirement income to working Americans. But respondents also believe that DC plans could improve their chances of participant success by importing winning strategies from institutional investors. These include:
  • Investment Approach: Establish a streamlined investment menu that includes simplified pre-mixed default options, access to alternatives and cost effective investment strategies.
  • Fee Structure: Minimize overall participant cost by utilizing institutional investment vehicles, maximizing the plan scale, conducting regular fee benchmarking and reducing or eliminating revenue sharing.
  • Governance: Dedicate appropriate resources and attention in proportion to DC assets invested, create efficient decision-making process and be mindful of fiduciary liability.
  • Decumulation: Enhance the plan’s decumulation strategy by providing education about distribution options, offering appropriate asset preservation and income generating investment products, and maintaining an ongoing dialogue with retirees.
  • Communication: Maintain lifetime engagement with participants through personalized communications clearly focused on specific outcomes.

The 2012 survey included a strong focus on investments, where plan sponsors and consultants say institutional models and approaches could have a positive impact on outcomes for DC plan participants. Institutional features would include a streamlined menu of eight to 10 investment options; an age-based asset allocation default option, such as a target retirement date fund; access to alternative asset classes, such as real estate or TIPS; and cost-efficient vehicles such as passively managed index options implemented through collective investment trusts.

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