DC Plans Can Benefit by Adopting DB Plan Best Practices

DC Plans Can Benefit by Adopting DB Plan Best Practices

A presentation by Robert C. Merton at Plan Sponsor Council of America’s 2014 National Conference highlighted several best practices used by defined benefit plans that could be adopted by defined contribution plans to help improve plan outcomes.  The two areas of focus were on communication with participants and on investment selection.    For example, since DB plans promise a benefit, their managers seek to invest to achieve that goal.  DB statements show beneficiaries what their retirement income replacement will be, not a total account balance.  Thus, he sees DC plans as needing to focus more on goals-based investing, and adopting their reporting practices accordinghly.  However, rather than focus on wealth accumulation, the goal should be to set a retirement placement income goal, and use the “funded” goal of DB plans.  For example, if a participant’s goal is to generate a $70,000 income, but the current portfolio can only generate $49,000, then the funding ratio is 70%.

Mr. Merton suggested that each participant have a tailored investment strategy to their needs, since a female earning $100,000 annual salary needs to invest differently than a male making $40,000.  He noted this problem is not solved by target-date funds, which are designed as a one-size-fits-all solution.

The entire article can be viewed here