Can You Get the Best of DB With the Best of DC? | Capital Group


Defined Contribution Insights

July 2016

Can You Get the Best of DB With the Best of DC?

Ideas for “DB-izing” a DC Plan

Why DBize?

The decline of defined benefit plans and the rise of defined contribution plans have created dilemmas for both plan sponsors and participants. Although they had their own disadvantages, DB plans make saving fairly easy for participants; DB participants are automatically enrolled and don’t have to make any investment decisions. With the growth of DC, much of that responsibility has shifted to participants, with mixed results. However, there are steps DC plan sponsors can take to seek the best of both the DB and DC worlds. By incorporating aspects of defined benefit plans into a DC plan design, plan sponsors can strive to address the following problems that many DC participants face:

  • Low enrollment
  • Inadequate contribution rate
  • Inappropriate asset allocation

Nine Steps to DB-izing a DC Plan

1. Automatic enrollment: Behavioral finance research shows that it is essential to encouraging participation. Don’t set the default contribution rate too low. Many plans are auto-enrolling at a 3% default rate. That’s likely to be inadequate to generate sufficient savings in retirement.
Tip: Auto-enroll at 6% or more.

2. Automatic escalation: Participants are unlikely to revisit their contribution rate on their own. Automating is key.
Tip: Auto-escalate at 3% or more.

3. Thoughtfully select and evaluate a QDIA:  Target date funds, balanced funds and managed accounts are options.
Tip: Consider employee demographics, fees and the asset-class mix at retirement.

4. Re-enroll participants: Many participants do not know how to appropriately invest. Re-enrolling into a QDIA can help address that problem.
Tip:  Have participants reconfirm their investments. Communicate the process thoughtfully and frequently to ensure success.

5. Streamline the number of investment options: Research shows that offering too many options can paralyze participants. Reduce the number of options.
Tip: Consider reorienting the lineup based on the three tiers in the following hypothetical example.

Streamline the Number of Investment Options

6. Encourage employees to keep assets in the plan: Reducing “leakage” is important to positioning employees for a successful retirement.
Tip: Educate employees about the potential consequences of taking a loan or withdrawal. Encourage roll-ins for new eligible employees. Provide services for past eligible enrollees and retirees.

7. Change the employee mindset: To encourage participants to invest and keep assets in the plan, help them think of their account as a future income stream.
Tip: Employee communications should seek to project how long savings will last in retirement. Translate account balances to annual income, incorporating future contributions and the impact of inflation.

8. Adjust the culture of the organization: Don’t be afraid to assume a more paternalistic (yet respectful) approach with employees.
Tip: Assume all employees will participate. Harness peer pressure tactics.

9. Go the extra mile to boost participation: Spurring participation is about more than merely providing a match.
Tip: Stretch the match as much as possible. Provide better self-directed automated services.

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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. 

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.