Russell Investments has put together a wish list of 10 changes for defined-contribution plans like that it hopes will allow companies to better create a fully funded retirement income stream for participants. The changes would result in DC plans acquiring some of the characteristics of defined-benefit plans
The wish list covers three main areas: updating investment governance, funding future DC liabilities, and designing menus and constructing portfolios to improve participant outcomes.
In the first area, Russell believes that improving governance by enhancing discipline and consistency could increase performance by 1% to 2% per year.
That would provide an incentive for committees to consider two strategies that Russell believes will be considered best practice by 2025. One is codifying Investment beliefs, which are a series of high-level principles that guide decision-making and supersede the personal views of individuals. A more prominent focus on environmental, social and governance factors in investment beliefs and investment policy statements is likely to emerge from the codification.
Second, Russell believes DC committees would benefit from focusing on strategy and outsourcing investment decisions to an internal or staff subcommittee or to an outside chief investment officer.
“By 2025, we believe that this will become the standard approach for DC plan oversight,” Russell said.
By that date, Russell also believes there will be broader utilization of multiple employer plans, or MEPs, which will expand coverage and increase overall savings for the retirement system.
To help fund future income needs, Russell recommends that sponsors focus on strategies that ensure that participants are on track to reach their retirement goals and that sponsors also periodically conduct retirement readiness studies to better understand the collective “funded status” of the participants in their DC plan.
Finally, as fewer employees are covered by a defined-benefit plan, DC committees should consider incorporating strategies that strike a balance between return-seeking and hedging strategies to improve the efficiency of their plan’s investment options, particularly at the end of the glide path. Incorporating such strategies could improve the efficiency of a plan’s investment options, Russell said.
And to supplement income from Social Security, Russell suggested that committees consider adding a retirement tier, including both guaranteed and non-guaranteed options, designed to provide predictable income.