Older companies, not upstarts, will take lead on innovative changes

The future of defined contribution may be well rooted in the past.

Although high-growth companies are rapidly adding workers and DC retirement assets, some DC industry experts say older companies and some mature industries may lead the charge to greater advances in the future.

"The leaders of the next generation are older, established legacy plans that have older employees," said Toni Brown, a San Francisco-based senior defined contribution strategist at American Funds, part of Capital Group Cos., referring to employers that offer defined benefit and defined contribution plans.

Companies with DB and DC plans "tend to pay more attention to employees' retirement needs," said Robyn Credico, the Arlington, Va.-based defined contribution consulting leader for Willis Towers Watson PLC. For some companies with only a DC plan, "DC is more of an attraction tool than a retirement tool."

The challenge for companies with DB and DC plans is: "How do I replicate my DB philosophy in a DC plan?" she said. These challenges vary among sponsors depending on workforce demographics, she added.

Ms. Credico and Ms. Brown said a big challenge to sponsors — whether they offer both plans or solely a DC plan — is convincing employees to keep their money in the DC plan when they retire.

They acknowledge the dynamics of baby boomers retiring and taking their accounts out of their plans. Even though younger people are being hired, their salaries, DC contributions and account balances don't match those of retirees.

Ms. Brown predicted this inflow-outflow imbalance will last another five to 10 years. "Then, there will be more DC growth because the money from younger employees will be significant."

Ms. Brown said companies with both DB and DC plans may have an advantage in improving DC plans.

"They think of it as a benefit, so it's easier for them to make a leap to faith," she said. "It's a little bit easier when you have a DB plan in place to establish a DC plan."

Of course, DC-only companies "can create a successful DC plan" for the future because "as companies age and employees age, they have a better understanding of retirement."

The legacy companies, Ms. Brown added, "appear to be more proactive" in establishing what she calls a retirement tier in their investment lineups to address the needs of older and longer-tenured employees with larger balances.

The retirement tier can include choices among a target-date fund, a collection of target-risk funds that become more conservative over time, stable value, fixed-income securities and/or an annuity-bidding platform that enables participants to choose out-of-plan annuities.

Ms. Brown cited the health-care industry as one that has "moved more quickly" to improve DC plans. "Their workforce cares for other people," she said. "They have a wide range of salaries and knowledge. Many employees are 55 and older."

Lori Lucas, president and CEO of the Employee Benefit Research Institute, Washington, cited health-care companies and hospital companies as making efforts to improve DC plans in part by encouraging retirees and/or former employees to keep assets in their DC plans.

"Health-care companies see it as a mission to care for their employees," partly as a reflection of their goals and also long tenures of many health-care workers, she said.

Ms. Lucas added that a series of focus groups conducted by EBRI in the summer among Silicon Valley companies yielded surprising results. "Even the high-tech companies were viewing their role as more paternalistic than I would have thought."

DC plan innovation won't be limited to a specific industry or retirement plan approach, said Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association in Washington.

"It depends on the workforce mix and internal corporate culture," he said. "The variables are too great to predict which group of employers will accelerate the pace of change."

Mr. Minsky added that large sponsors "might be leaders in investment outsourcing. Employers are looking ways to "move away from owning the fiduciary responsibility of investment choices," he said. "They have the most to gain from figuring out the fiduciary puzzle."