Researchers tout DC plans as the best retirement optionNews added by Benefits Pro on February 12, 2014

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By Paula Aven Gladych

Professors at the University of Illinois at Urbana-Champaign believe defined contribution retirement plans are the best approach to solving the retirement crisis in the United States.

Policy changes, product innovations and improved plan design decisions by plan sponsors have made today’s DC plans a much better retirement system than they were even 10 years ago, the study found.

To improve and expand coverage and participation in defined contribution plans, the authors, Jeffrey Brown and Scott Weisbenner, recommend improving incentives for employers to offer plans and to make part-time and recently hired workers eligible to participate. They also recommend boosting contribution rates through automatic enrollment and automatic escalation, which can result in higher savings rates.

They also suggest removing regulatory barriers that have discouraged employers from including guaranteed retirement income options, including annuities, in their defined contribution plans as a way to help people better manage their assets in retirement.

The paper supports the view that the private defined contribution system must continue to play a central role in providing a secure source of retirement income for current and future generations of workers. However, policymakers, plan sponsors and the retirement industry need to work together to extend retirement saving and income opportunities to more households.

They also need to do a better job of turning the conversation to retirement outcomes rather than focusing on DC plans as wealth accumulation tools, the paper said.

“In contrast to those who view the employer-based DC system as one that should be replaced, we believe that the improvements over the past decade have created a very strong foundation upon which to continue to build an even stronger retirement system,” the authors said in the study.

They point out that everyone is nostalgic about defined benefit pension plans but even those were not so good before the Employee Retirement Income Security Act came about. That’s because worker retirement benefits were exposed to substantial funding risk and short-tenure workers typically had no benefit at all.

Options like target-date funds and automatic enrollment have made it even easier for workers with defined contribution plans to save for retirement and the authors believe the system will continue to grow and evolve in the future.

Calls for a greater government role as a direct provider of retirement income are “unrealistic and undesirable. Given the enormous fiscal pressures facing the U.S. government that are arising in part because of the pay-as-you-go nature of the existing social insurance system, it is politically unrealistic and economically undesirable to suggest that the government should take on an even larger role in this sphere, particularly when there already exists a well-functioning private system in place upon which to build,” the authors said.

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