WASHINGTON -- A white paper from the Urban Institute predicts defined contribution plans eventually will be a collection of individual retirement accounts.
The Urban Institute's paper -- written by Pamela Perun, consultant to the retirement project at the Urban Institute, and C. Eugene Steuerle, a senior fellow with the Urban Institute -- predicts 401(k) plans will wither away.
In about 35 years, defined contribution plans could become "obsolete," the paper said.
"(T)he financial services industry provides almost all the services required by most employer-based defined contribution plans: off-the-shelf prototype plans; custodial services; investment options; employee communication; distribution functions; accounting; and tax reporting," the paper said. "Practically speaking, the employer is often just the conduit of contributions to the individual accounts held in the plan."
But not everyone in the defined contribution world agrees.
"Clearly, 401(k)s will be evolving, but will we be replacing the current system with a retail system? I doubt it," said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago. "I think there will be retail-like features but probably the current overall structure will remain the same."
The federal government would want to retain the current system because employer-sponsored plans contain more benefits for lower-paid workers than a retail-type arrangement would, Mr. Wray said. Moreover, few lower-paid workers would save for retirement without an employer-sponsored plan in place, he said.
Higher-paid workers would be more likely to use a retail-like defined contribution plan, Mr. Wray said. They have the benefits of outside advisers and under the current system would be more likely to gravitate to features like self-directed brokerage windows, which are retail in nature, he said.
But in order for the defined contribution system to go more retail, several legislative changes would have to be made, Mr. Wray said. They include: changing the fiduciary structure for defined contribution plans; raising the contribution limits for 401(k) plans; and narrowing the gap between how much a person can save in IRAs and 401(k) plans.
"Right now the benefits are loaded to encourage people to save in a 401(k) plan instead of an individual arrangement," Mr. Wray said.
The limits would have to be at least equalized before there could be retail defined contribution arrangements, he added.