Rethinking Employee Benefits For A More Secure Retirement

What Defined Contribution Plans Do Well ​

Over the past few decades, defined contribution plans have undergone changes that have improved retirement savings outcomes for many Americans. ​

Automatic enrollment has increased participation. Automatic escalation has encouraged employees to save more over time. Target-date funds and other default investments have made investment decisions easier. And technology has given participants better access to their accounts. ​

Those are all important improvements. But they raise a bigger question: Are we measuring how good our retirement plans are, or how good our savings vehicles are? That distinction matters. ​

How The Thinking About Retirement Savings Is Evolving ​

The way many employers evaluate their retirement plans focuses heavily on inputs such as the percentage of employees that participate and how much they contribute. Those metrics can tell us whether employees are accumulating assets, but retirement is not only about accumulating an account balance. The level of security workers have in retirement is also important. ​

Employers are beginning to look beyond whether employees can build enough wealth to retire. The issue that’s emerging for retirees now is how to manage what they’ve accumulated so that it can last their lifetime. This is a problem many Americans struggle with once they retire. ​

In my previous article, I addressed the growing conversation about providing guaranteed lifetime income for retirees and emphasized the role businesses can play. Though defined contribution plans, such as 401(k)s, have been an effective means of accumulating retirement savings for many Americans, many retirees grapple with how to utilize and preserve that savings during retirement. A recent study from the Employee Benefit Research Institute found that DB income helped preserve retiree assets significantly. ​

While we have improved the accumulation side of retirement, the decumulation problem has persisted. Expecting Americans to manage their retirement savings so it lasts for an unknown period of time is a tall order. A strong retirement strategy helps employees save more and have enough money to last through their retirement.

A Two-Pronged Approach To Retirement ​

The retirement industry has spent decades treating defined benefit and defined contribution plans almost as opposing models. But today’s plan-design conversation doesn’t need to be binary. ​

A recent Wall Street Journal article (registration required), titled “Pensions Were on the Brink of Extinction. Now Companies Are Bringing Them Back,” noted the evolution toward newer pension plan designs with market-linked returns and the resulting reduction in some of the funding risks and uncertainty historically associated with traditional pensions. That creates the opportunity for a different model. ​

Think of it as a market-based retirement strategy: pairing a market-based defined contribution plan with a market-based defined benefit plan. The 401(k) doesn’t disappear. It continues doing the things it does well. ​

But the defined benefit side of the equation can complement it by addressing outcomes that are much harder to solve through the DC plan alone. Together, the two structures can be designed around a broader retirement objective rather than simply maximizing the effectiveness of a savings account. ​

This provides employees the option of transferring a portion of their DC balance to the DB plan for the purpose of receiving lifetime income. This allows employees to choose how much of their savings they allocate to lifetime income and flexible savings. This retirement strategy can also address the decumulation problem through monthly income for life. ​

Why The Renewed Interest In Defined Benefit Plans? ​

According to the Wall Street Journal article, companies including IBM, JBS Foods, Northwell Health and PECO have introduced or reopened pension benefits, driven by factors including employee retention and labor negotiations. In short, employees are demanding more security in retirement, and employers are looking for ways to retain a stable and experienced workforce. ​​

The Wall Street Journal quoted Wharton School pension expert Olivia Mitchell describing what is happening as “a selective revival under way.” But the more important development may not be the revival of pensions themselves. It may signal the beginning of a broader reconsideration of what American workers actually need from their retirement plan. ​

While a return to the pension system of the past is unlikely, employers are beginning to consider the retirement problem more holistically. If the goal is to help employees retire successfully, what combination of tools gives us the best chance of getting them there?

The next generation of retirement benefits may not be the dichotomy of DB or DC. It may be DB and DC, designed together, measured differently and focused on the outcome that mattered all along: the ability for Americans to achieve a secure retirement.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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