investments
General Business

Defined Contribution Plan Trends

Prognosticators foretell of things to come.

The continued decline of defined benefit plans along with the projected Social Security and Medicare financing shortfalls will put more pressure on defined contribution (DC) plans to become income generators for future retirees.

The hangover from the Department of Labor fiduciary rule, the pending Security and Exchange Commission best interest rule and the fact that more than $1 billion leaves DC trusts daily for IRA custodial accounts and annuities has re-focused the industry to enable income generators from DC plans directly, instead of rolling assets over to an IRA in order to create a financial plan for participants.

The primary prognosticators in the retirement industry foretell the income trends to watch:

Retirement legislation: Provisions in several bills in Congress will gain additional attention in the 2019 legislative agenda. Proposed legislation could usher in greater interest and adoption of guaranteed income options for 401(k) and other DC plans. These bills contain provisions that promote the adoption of income solutions in our DC system by making it easier for fiduciaries to include options in their plan, provides portability options for participants when a plan sponsor may no longer want to offer the income solution, and requires participant statements to display the participant’s balance and also the income – during retirement – their balance would provide. 

Industry consolidation: As baby boomers continue to withdraw assets from their DC accounts, record-keepers will be under increasing pressure – especially those record-keepers whose revenues strongly depend on assets under management. These record-keepers could improve their revenues and increase the security of its participants by offering institutional income solutions.

Comprehensive view of retirement security and further integration of HSAs and 401(k) plans: DC record-keepers that integrate with Health Savings Accounts will have an advantage as the definition of “retirement security” broadens to include healthcare cost late in life. Ultimately, the broader and comprehensive view of retirement security can also help DC providers to consolidate retirement assets in the participant’s DC plan and offer draw-down strategies that increase the security of the participants who take advantage of such services.

Market conditions and correction: Participants could face difficult investment decisions if a prolonged market correction occurs. A more challenging stock market along with interest rates that rise over the long run would cause even well-diversified portfolios to decline in value. How participants react could drive greater proliferation of, and demand for, products offering downside protection, stable value contracts, insurance products such as deferred annuities and guaranteed income benefits.

About the Author: Bob Melia is executive director of Iselin-based Institutional Retirement Income Council (IRIC), a non-profit think tank for the retirement income planning community.

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