DC plans need a total makeover if they're going to fulfill participants' retirement expectations.
According to the latest paper by M. Barton Waring and Laurence Siegel, "Wake Up and Smell the Coffee! DC Plans Aren't Working. Here's How to Fix Them," defined contribution plans need to change their contribution levels, investment structures and payout options to be viable retirement savings vehicles.
Mr. Waring is head of the client advisory group at Barclays Global Investors, San Francisco; Mr. Siegel is director of research for the Ford Foundation, New York.
The two have crusaded to improve DC plans for several years. This latest paper takes their argument a step further and says if significant changes aren't made — such as incorporating annuities — participants will not be able to reach their goals.
"It isn't that (DC plans) can't work; in the current system, they aren't working especially well. Contributions are not mandatory, the level of savings is pretty low, and there is access to the funds for emergencies," Mr. Waring said in an interview.
The contribution issue is the first part that needs to be tackled, he said.
"A DB plan has more benefits and advantages than people realize. It's a forced savings plan. Within the DC universe, we need to address some issues like: should we make a contribution mandatory? Should we be able to restrict the access to these funds before retirement?" he said.
While mandatory contributions are not allowed by law, increasing the maximum deferral rate — which is set by law, currently at $15,000 a year — would be a positive step, said Mr. Waring.
A successful DC plan would allow a deferral rate of 15% or in some cases 30% of total compensation, said Mr. Waring. The exact amount would be more a function of interest rate levels, life expectancies and start dates than a set rule.
Automatic enrollment and automatic escalation features could also help solve this part of the DC problem, he said, noting that more plans are adding such features.