Prudential: DC Plans Need To Evolve

New research sponsored by Prudential Financial revealed that the need for guaranteed income in retirement planning is crucial as the shift continues away from defined benefit to defined contribution plans.

According to a release, the findings of the latest National Retirement Risk Index (NRRI), published by The Center for Retirement Research (CRR) at Boston College, reveal households with access to a workplace retirement plan are less at risk of not being able to maintain their standard of living in retirement. In addition, the type of plan is also a key factor: 20 percent of households with a defined benefit plan through their current employer are at risk, while 53 percent with only a defined contribution plan are at risk. That compares to 68 percent with no plan at all.

The latest NRRI update also indicates that the percentage of households at risk of being unable to maintain their pre-retirement standard of living has improved slightly to 52 percent from 53 percent three years earlier.

Every three years, the Center for Retirement Research (CRR) conducts an official update of its National Retirement Risk Index (NRRI), which measures Americans' retirement preparedness. The NRRI is constructed using data from the Federal Reserve's Survey of Consumer Finances. The Index results from comparing households' projected replacement rates – retirement income as a percent of pre-retirement income – with target rates that would allow them to maintain their living standard. The latest update analyzed not only the overall NRRI results, but also compared results for those with a defined benefit (DB) plan, those with only a defined contribution (DC) plan, and those without either type of plan.

The research indicates that households who have defined benefit income are in better shape than those who only have a defined contribution plan, and those who have a defined contribution plan are in much a better position than those who have no workplace retirement plan. However, the prevalence of defined benefit plan income for workers in the private sector will continue to decline, as companies freeze, close, or terminate defined benefit plans.

"The disparity in retirement preparedness for those households with a defined benefit plan and those with only a defined contribution plan speaks to the need for plan sponsors to evolve their DC plans with features already in the marketplace," said James McInnes, senior vice president and COO, Total Retirement Solutions at Prudential Retirement. "We expect to see an improvement in retirement readiness for defined contribution plan participants as DB plan characteristics, such as automatic enrollment and guaranteed income streams, are added to the DC plan construct, which already features flexibility and portability for today's mobile workforce.

A new Prudential paper, "Planning for Retirement: The Importance of Workplace Retirement Plans and Guaranteed Lifetime Income," summarizes the latest NRRI research, including the increasing importance of financial advisors, who can assist individuals in managing the risks in the shift from defined benefit to defined contribution plans, including helping households decide which products and strategies to use to generate a retirement income stream that lasts a lifetime.

The key implications of these findings are:

-Defined benefit plan obligations to workers are critically important: The latest NRRI results reinforce the importance of defined benefit plan income to those households who will be receiving retirement benefits from these plans.

-Defined contribution plans should be enhanced to take on more characteristics of defined benefit plans: The difference in retirement preparedness for those households with a DB plan and those with only a DC plan is significant.

-Greater access to defined contribution is needed: While 74 percent of all full-time employees have access to a workplace retirement plan, only 50 percent of full-time employees who work for a small employer have access.1 Prudential has long supported the use of Multiple Employer Plans as vehicles to enable small employers to offer workers access to a retirement plan. As generally envisioned, the plans would allow companies employing fewer than 100 people to band together and offer a single defined contribution plan, thereby achieving economies of scale that serve to lessen administrative burdens, costs, and potential fiduciary liability.

–Social SecuritySocial Security will continue to play an important role in providing financial security to retirees.

-The importance of financial advice will continue to increase: Financial advisors will play an even greater role as defined contribution plans increasingly become the only workplace plans available to private sector employees.

"In addition to participants utilizing financial advisors more and more, smart strategies for claiming Social Security benefits at retirement will continue to prove valuable," McInnes said. "Prudential's paper, Innovative Strategies to Help Maximize Social Security Benefits, provides some insights."

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