Defined contribution (DC) plans do a good job—but they could do better. Coverage, adequacy, technology, a lack of trust and a lack of engagement are current challenges with which next-generation, or 2.0, retirement plans seek to tackle.
And now version 3.0 is just around the corner, according to Towers Watson’s Thinking Ahead Institute, which says it will cause “significant change.”
Version 3.0 will include hyper-customization, integrated wealth management will move beyond its role as a tax-effective savings vehicle, to become more tech-savvy, customized to the individual, cost-effective and better governed.
“The need for change has been clear for a long time,” Bob Collie, head of Research at the Thinking Ahead Institute, said in a statement. “Even 10 years ago, we talked of a version 2.0 of DC that was built around the purpose of providing income throughout retirement. It’s only recently that real progress has started on this front. But momentum has been building, and we expect things to develop quickly from here.”
The research draws on the findings of a survey and interviews with 10 DC organizations—covering the organizations’ mission, operations, governance, investment, member engagement, retirement income strategies and sustainability.
Drivers of DC growth
Even though each DC market is driven by local considerations, global themes did emerge. These include the increased focus on retirement income, the drive to scale and a redefinition of the employers’ role.
“The importance of the regulatory role should also not be overlooked in enabling and driving the shift to a stronger retirement plan, according to the research,” the researched added.
The report sees continued industry consolidation in response to commercial, governance and technological demands. The growth of master trusts and other multiple-employer platforms is an important industry development.
“The history of DC has largely been a story of evolutionary happenstance, rather than working toward a master design plan,” Collie concluded. “DC has become the world’s dominant retirement savings vehicle, and work is needed if it will live up to the responsibilities of this role. The next few years will be pivotal ones in the development of retirement plans all around the world.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
