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Defined Contribution

U.K. DC default options need more transparency – report

Flawless magical crystal sphere.

Defined contribution default options need clearer investment objectives and more cost transparency, according to a Pensions Policy Institute report published Thursday.

In the report, "DC Default Investment Strategies," the institute highlights barriers preventing U.K. participants and their employers from having sufficient data to assess value for money of their defaults and to hold trustees, money managers and insurance companies accountable.

These barriers include confusing, contradictory and unclear language used by providers when outlining a default investment strategy vs. its investment objectives. Participants face inconsistent performance metrics and lack of transparency on costs and charges, the report said.

Although providers are required to set objectives for their default investment strategy, some providers report objectives solely as a statement of how contributions are invested rather than alongside underlying objectives of these investments, the report added.

However, not all employers have the ability or inclination to undertake the assessment of the default investment option, PPI noted. Additionally, a lack of clear metrics against which the past and future performance of the default strategy should be assessed makes it difficult for participants to understand costs of their DC savings, it added.

The institute also noted that the bundling of services by providers in the U.K. makes it difficult to understand how much is being paid for each of the services. According to PPI, for cost breakdowns to be transparent, they need to state separately how much is paid by participants to the DC provider vs. firms the provider works with to provide the services.

"With the advent of auto enrollment, millions more workers are now saving into DC plans, and most of them invest in a default fund. Inconsistent and confusing language and lack of comparable information make it hard to assess the delivery of plans. More transparency on costs and charges and a clearer investment objective could help savers and trustees to better evaluate if the investment strategies delivers for participants," said Chris Curry, director at the PPI, in a news release.

According to PPI, 99.7% of participants of multiemployer plans and 94% of participants in contract-based DC plans are enrolled into the default options.