DC providers urged to simplify explanations to participants

Improvements in communication around defined contribution plans would lead to better retirement outcomes for participants because savers need to be more engaged and active in their choices than they would under defined benefit arrangements.

One proposed change is for DC providers to focus on helping participants to understand the value of their retirement savings in terms of the income they can expect to receive once they retire rather than showing them an account balance, delegates at Pensions&Investments' WorldPensionSummit conference heard Wednesday.

"The purpose of the retirement system is an income goal, not a wealth goal," said Robert C. Merton, distinguished professor of finance at the Massachusetts Institute of Technology's Sloan School of Management, and the John and Natty McArthur University professor emeritus at Harvard University, in a presentation. "Income is something that all of us can relate to irrespective of education," he said.

Mr. Merton said individuals will receive less income from U.S. Treasury bond investments due to income volatility in the assets. There was an 87% decline in income from 10-year U.S. Treasury bonds in the past 13 years, he said.

If Treasury exposure is considered from the point of view of "what matters to a retiree in a retirement plan, which is not the value of the account but how much income you can have in retirement ... then we see ... that a Treasury bill has enormous income volatility. Huge. It probably is the most risky asset you could buy for a retirement account focused on income," Mr. Merton said.

There is not any connection between wealth and income units, "so if we measure it wrong, we can't possibly manage the risk right," he added.

Participants' understanding of their retirement savings could also improve with enhanced disclosure. Recent regulatory changes in the U.S. under the SECURE Act and in Mexico are set to increase participants' insight into their savings by putting requirements on plan providers to disclose retirement income projections to plan participants.

Mr. Merton also discussed other tools that could improve retirement outcomes in addition to maximizing benefits from savings and investments, noting examples of equity release from mortgages, pension bonds and jobs designed for older people, such as public area gardening.

Speaking on a separate panel, Matt Simms, trustee at Hermes Group Pension Scheme, St Albans, England, agreed that retirement arrangements are complex for participants to understand. "Tweak on top of a tweak on top of a tweak … (it) just becomes this patchwork of complexity," he said, referring to changes in the retirement system that have been made by governments around the world. But he said: "The system is not broken if you understand it." The plan had £235 million ($317 million) in assets as of Dec. 31, 2017.

To make it simpler for people not involved in the financial world, however, speakers agreed that participants should be engaged by their DC providers in a more effective way. Mr. Simms said participants' engagement with websites is minimal. "We have to keep things simple and not force engagement," he said.

He added that part of the solution is to ensure that default options in defined contribution plans are working well.