Defined contribution plan executives and money managers still have plenty of work to do in adopting some of the best practices laid out in the Pension Protection Act of 2006, according to Seth J. Masters, chief investment officer of AllianceBernstein Defined Contribution Investments, New York.
Speaking at the Profit Sharing/401k Council of America's annual conference in Scottsdale, Ariz., held late last month, Mr. Masters said while the DC industry has made some progress — some 65% of DC plans offer qualified default investment alternatives and 23% use low-cost investments — it still needs to work harder in adopting other key practices. For example, just 17% of DC plans automatically enroll all of their employees, and only 12% offer auto-escalation of contributions to all workers, he said, citing AllianceBernstein data.
“The good news is that plan sponsors, politicians and participants have all gone for defined contribution,” Mr. Masters said. “The bad news is that all of those constituents are counting on us to make it work.”
The future, he said, will likely involve plans offering automatic lifetime income guarantees as part of target-date funds. “Participants don't want a straight annuity,” he said. “People not only want outside protection, they want access to their money.”
But about $200 billion is taken out of DC plans each year, and 90% of that is rolled over into individual retirement accounts, Mr. Masters said. “It doesn't have to be that way. Our thinking is that we're (the defined contribution industry) better at caring for participants after they retire, and we're making the right decision by keeping them in the plan,” he said. “Plans are going to have to stand up and make clear to providers that this is what they want.”
In his keynote address, David Wray, president of the PSCA, Chicago, looked back over the past year, noting “the employer-sponsored DC system has passed its trial by fire.”
Despite the volatile markets and economic slowdown, Mr. Wray said, plan participants by and large continue to contribute to their DC plans. “This is not about inertia,” he said. “It's about alignment of interests. People go along with their (DC plans) when they think it's in their best interest.
Mr. Wray pointed out that the participation rate at the average DC plan rose to 82.7% in 2008, from 81.9% in 2007. The average deferral rate was 5.5% in 2008, in line with 5.6% in 2007.
“Sixty million participants had their fingers on the button,” Mr. Wray said. “The DC system was a tremendous force of good over the past year. Markets would have fallen even further. We were net buyers of equities. We were part of the solution in calming the global waters.”