Will DC Plans Look More Like DB Plans by 2025?

A recent blog post suggests that may be the case, with more employers moving to incorporate features of the most successful defined benefit plans. 

 

“We believe that, by 2025, more employers will adopt some of the characteristics of the most successful pension plans to help put them on a path to create a fully funded retirement income stream for participants,” Russell Investments’ Kerry Bandow and Holly Verdeyen contend in “What will DC plans look like in 2025?” 

 

Assigning scores to 10 changes they believe may be incorporated by 2025, with 1 equaling low probability and 5 equaling high probability, Bandow and Verdeyen give high marks to establishing investment beliefs, expanding coverage through MEPs and implementing various menu design changes, among others. 

 

In the post, they specifically look at updating investment governance structures, the need to increase savings to better fund future DC “liabilities” and using more efficiently managed portfolios to increase the likelihood that employees will have successful retirement outcomes.

 

 

Establishing investment beliefs and delegating investment decisionmaking will likely be considered “best practices” by 2025, according to the post. Pointing to research that suggests that improved governance focused on enhancing “discipline and consistency” can increase performance by 1% to 2% per year, the authors believe that alone should provide “ample incentive” for committees to update their investment strategies. 

 

“Because codified investment beliefs are foundational for improved governance, we strongly believe they should become standard for all large DC plans,” Bandow and Verdeyen write. They also expect to see a more prominent focus on ESG factors in investment beliefs and policy statements.

 

Noting that committees are often composed of senior level executives with limited capacity to focus on the organization’s retirement plans, the authors believe delegating investment decisionmaking will become the standard approach for DC plan oversight. “DC committees would benefit by deciding to focus more time on strategy and outsource investment decisions to either an internal sub-committee (e.g., staff) or to an outsourced chief investment officer (OCIO),” the authors emphasize.  

 

 

Bandow and Verdeyen also give personalized default options a moderate probability of being implemented by 2025, noting that advances in retirement technology provide the ability to personalize options to participants’ unique characteristics and preferences. 

 

Since recordkeepers now allow plans to use almost any manager in their investment menu, they are hopeful that recordkeepers will also move to open architecture for managed account providers. “Assuming we see these positive changes, we believe that use of managed accounts as QDIAs will increase significantly by 2025 and annual cash flow could eventually surpass the level of assets directed at TDFs,” Bandow and Verdeyen suggest. 

 

The addition of a retirement tier that includes both guaranteed and non-guaranteed options is also likely to be implemented. According to the post, adding such a tier would provide employees with “confidence to avoid delaying retirement and will allow employers to better deal with workforce management issues.” What’s more, the authors note that these factors, along with the recent enactment of the SECURE Act, should provide “enough incentive” for plan sponsors to introduce decumulation options, resulting in an increased use of these strategies by 2025.

 

To assist with diversification, incorporating alternative strategies such as real estate, hedge funds and private equity, like those used by large pension plans, is another approach that may be considered by 2025, either in a white-label structure for the core investment menu or in custom TDFs. This idea was given slightly lower probability, at 2 out of 5, with the authors noting that it may take “legislative relief or a prolonged bear market.