Defined contribution plans will start looking more like pension plans as they borrow concepts such funded ratios and create lineups with real estate, hedge funds and private equity, according to a recent blog post by Russell Investments.
By 2025, plan sponsors will as a matter of best practice conduct periodic retirement readiness studies of their plans "to better understand the collective 'funded status' of their participants," the authors predict in the blog post. They give their prediction a probability rating of 5, the highest rating on a 1-to-5 scale.
The authors also anticipate that by 2025 more plan sponsors will use managed accounts as the qualified default investment alternative in their plans, with annual cash flow potentially surpassing the level of assets directed at target-date funds.
They also foresee plan sponsors adding a retirement tier to their lineups with both guaranteed and non-guaranteed investment options. They rate the probability of more sponsors using managed accounts as the QDIA option at 3, the same probability they give to the prediction that sponsors will add retirement tiers.
In addition, the authors see more plan sponsors incorporating alternative strategies, such as real estate, hedge funds and private equity, into their lineups, "similar to the approach used by large, well-run pension plan portfolios." Broadening the investment lineup to include alternatives strategies may be accomplished in "a white-label structure for the core investment menu or in custom target-date funds," they said. The authors, however, are less confident that sponsors will move to diversify their strategies, saying that it will "take legislative relief or a prolonged bear market." The authors give it a probability of just 2.
The anticipated changes, which the authors support and hope "will soon become mainstream," would increase the likelihood that employees will have successful retirement outcomes. "Although DC plans today appear to be significantly different than the first generation, the pace of meaningful change now seems painfully slow," they said. "For DC plans to succeed as our primary retirement vehicle, it is important that committees consider the strategies discussed in this blog."