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Special Report

401(k) plans are gradually picking up features of their DB brethren

J. Mark Iwry
J. Mark Iwry is a big proponent of options that can produce a lifetime income stream for retirees.

As 401(k)s become the standard for private-sector workers, they are slowly adding defined benefit plan-like features.

The most visible of those features include automatic enrollment and collective investments, which have gained traction in recent years in the form of target-date fund lineups.

J. Mark Iwry, until Jan. 20 the senior adviser to the secretary of the Treasury and the Treasury Department's deputy assistant secretary for retirement and health policy, cited auto enrollment as one of three primary “cardinal virtues” he has championed.

Companies have embraced that virtue. According to a recent Callan Associates survey, about 65% of defined contribution plans used auto enrollment in 2016, up from 61% in 2015 and 52.1% in 2012.

“A second virtue of pension plans is that they've traditionally provided "pensions' — low-cost lifetime income,” Mr. Iwry said. “The defined benefit plan is in a sense an annuity factory: a low-cost way of providing lifetime income security. The ability to get lifetime guaranteed retirement income from a plan is extremely valuable but has been eroding. So we've been encouraging 401(k) plans to incorporate lifetime income by, for example, buying an annuity from an insurance company or otherwise providing long-term income that roughly approximates an annuity.”

At the moment, however, plan sponsors are hesitant about lifetime income options because of concerns about fiduciary responsibility.

A Government Accountability Office report in September noted that “fear of liability may deter plan sponsors from offering annuities” because the U.S. Department of Labor does not offer any kind of liability relief incentive for sponsors to offer them.

Whether the DOL could offer this during a Donald Trump administration is an unknown, said Olivia Mitchell, professor of insurance and risk management at The Wharton School, University of Pennsylvania, Philadelphia, and executive director of the Pension Research Council.

“Up until Jan. 20 it looked like we were well on that path. Regulations were being written,” Ms. Mitchell said. “There was a lot of support for it in the (Obama) administration. I just don't know if this will be derailed now that the current administration has so much on its plate.”

Mr. Iwry's third “cardinal virtue” of defined benefit plans, he said, is professional collective investment of DC plan assets.

“We've encouraged 401(k)s to move in this direction because collective, institutional investment delivers lower costs through bargaining power and economies of scale, while professional management brings investment know-how, discipline and regular rebalancing. Professionally designed default funds and investment menus are incremental steps in this direction; a larger step would remove individual self-direction of investments from employer contributions,” Mr. Iwry said.

The recent Callan Associates survey showed that while 401(k) plans still use mutual funds, more are using collective investment trusts. Of the plans surveyed, 65.2% of plans offered CITs in 2016, up from 60% in 2014 and 48.3% in 2012. Mutual fund usage, meanwhile, dropped to 84.3% of plans in 2016 from 88.2% in 2014 and 92% in 2012.

This article originally appeared in the February 20, 2017 print issue as, "401(k) plans are gradually picking up features of their DB brethren".