As Defined Contribution (DC) plans become the preferred retirement plan structure around the world, a more modern generation is emerging that combines the best elements of the traditional DC plan and its predecessor, the defined benefit (DB) pension plan. According to a Vanguard Asset Management (“Vanguard”) survey of multi-national companies with retirement plan sponsors in several countries, employers that offer DC plans tend to be taking a more prominent role in seeking better investment outcomes for employees and demanding fee transparency, which is leading to the greater availability of low-cost investment options in the plan.
The survey, Global Trends in DB and DC Plans, showed:
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An expected increase in employer contributions. 71% of respondents expect to increase employer contributions to their DC plan either dramatically or somewhat.
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A growing use of target-date funds. 66% of respondents prefer to use a target-date fund (TDF) as their plan’s default investment option, but actual adoption is lagging, largely outside of the US. In the US off-the-shelf target-date funds have been a runaway success, with nearly two-thirds of respondents using them for their US DC plans and another 13% using custom TDFs. For DC plans outside the US, 30% of respondents use either off-the-shelf or custom TDFs. Although a majority of sponsors prefer TDFs, structural and regulatory differences outside the US have slowed the adoption rate.
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A combination of active and passive investment default options. 57% of respondents prefer to use a mix of active and passive strategies in their default fund structure. Another 38% prefer all-passive default funds. Very few (5%) would prefer an all-active lineup for their DC default fund.
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The importance of fee transparency. 79% of respondents indicated that fee transparency is one of the most important considerations for choosing whether to use a “bundled service approach”—in which the plan administrator and investment manager are the same and the fees for both are bundled into one asset-based fee—or an unbundled approach, which separates the cost for each and thus clarifies the extent to which higher asset-based fees may be subsidizing plan administration costs. With greater awareness of a plan’s overall costs, many sponsors are seeking lower-cost service and investment options.
Steve Charlton, Vanguard’s Defined Contribution manager for Europe, commented,
“The modern DC plan reflects innovation that is driving an evolution in the traditional DC plan structure to provide many of the best elements of both a DB plan and a DC plan. As a result, we expect better retirement outcomes for participants. The push for fee transparency will continue, leading to structural changes for DC plans, including more unbundling of services and greater use of passive mandates, especially in default options, which will lead to lower overall plan costs.”
Additional findings of the survey:
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The switch to liability-driven investing (LDI) in defined benefit (DB) plans will continue, with 73% of organisations preferring LDI strategies over total return strategies for managing DB assets. This preference was especially strong for DB plan sponsors in Europe.
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Legacy DB plans continue to require significant oversight, but plan sponsors expect to spend more resources on DC plans in the future, reflecting the expectation that DC plans will become more prevalent.
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While the majority of global retirement plans are managed using a combination of local and central corporate governance, there has been an increasing trend toward a more centralized approach to create consistent policy and structure and better manage risk.
The survey was conducted in the second half of 2014 among more than 90 multi-national client companies, with an aggregate $650 billion in DB and DC plan assets. Participating companies are based around the world and administer retirement plans in at least three countries.
To download the survey please click on the link below
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