Defined Contribution Plans: 12 Practical Recommendations to Help Encourage Better Outcomes

INTRODUCTION
According to the Center for Retirement Research (CRR) at Boston College, the greatest private-sector factor behind the negative trend seen in its National Retirement Risk Index (NRRI) over the past quarter century is the ongoing shift in the composition of pension coverage from Defined Benefit (DB) to Defined Contribution (DC) plans. (The NRRI measures the percentage of working-age households who are at risk of being unable to maintain their pre-retirement standard of living in retirement.) In 1983, 62 percent of U.S. workers with pension coverage were enrolled in DB plans only, while 12 percent participated only in 401(k) plans, the most common type of DC plan.

By 2004, that trend had reversed itself and then some, with 63 percent of workers enrolled in 401(k) plans and just 20 percent in DB plans. (The number of workers covered by both types of plans declined from 26 percent in 1983 to 17 percent in 2004.)

This large-scale transfer of retirement risk from organizations to individuals has accelerated since 2004 with an increase in the number of sponsor organizations freezing or terminating pensions, and it is expected to continue. Among the factors driving this trend are the desire of sponsoring organizations to cut compensation costs, their response to steadily increasing health-care costs, their concern about the impact of defined benefit plans on earnings, and the emergence of two-tier pension systems at many organizations.

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CONTENTS
Introduction 1
Challenges 2
Best Practices: Building Blocks for Effective Solutions 5
Automatic Enrollment 6
Default Savings Rate 9
Asset Allocation 10
Automatic Contribution Increase 10
Encouraging Comprehensive Planning 11
The Ultimate Goal: Lifetime Income 11
Recent Legislation Encourages Solution-Oriented Design Changes 12
“Autopilot” Features 13
Guaranteed Lifetime Income 13
Investment Advice 13
Conclusion 14

Visit Prudential Retirement Website

Prudential Retirement provides products and services that help people achieve the financial security they need to live fulfilling lives today and imagine new possibilities for tomorrow.

Our approach focuses on leveraging the lessons of behavioral finance through the automation and simplification of the most critical components of Defined Contribution plans, including enrollment, asset allocation, and contribution escalation.

It’s an approach that EBRI says Congress has “implicitly endorsed” with the enactment of the Pension Protection Act of 2006.

Prudential Retirement provides consolidated resources to meet all the needs of DC plan sponsors and participants. With more than 80 years of experience, we offer a dedicated group of professionals to provide retirement plan solutions for public, private, and non-profit organizations. Our services include state-of-the-art recordkeeping, administrative services, investment management, comprehensive employee investment education, and communications and trustee services.

We are your Rock for Retirement.

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