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Defined Contribution Plans Borrowing from Defined Benefit Playbook to Boost Results, According to BNY Mellon Paper

DC plans putting greater focus on lower-fee vehicles, alternative strategies, and income generation 

Sponsors of defined contribution (DC) retirement plans are looking to incorporate a growing number of features typically found in Defined Benefit (DB) plans as they seek to improve returns, lower costs and provide more cash to retirees, according to a white paper from BNY Mellon, a global leader in investment management and investment services.

The paper, The DC Plan of the Future: DB Principles for the DC Generation, was based on interviews with 20 leading providers of DC retirement plans to large U.S. corporations. It provides valuable insight into how these companies are responding to the sea-change in today's pension environment and suggests ways to increase plan efficiency.

The top priorities to improve current DC plan offerings are increasing the use of low-fee institutional vehicles, utilizing alternative strategies, and generating an income stream during retirement, according to the report. Thirty-six percent of respondents indicated they plan to make greater use of separate accounts, and 25 percent said they plan to introduce generically labeled investment strategies managed by outside investment managers. These private or 'white label' funds typically have lower costs than mutual funds. Thirty-six percent of the respondents said they plan to decrease the use of mutual funds. Lower fees can lead to higher overall returns for retirement plan participants, the report said.

"Many of the principles and best practices of DB plans can be used to enhance the performance of today's DC offerings," said Dan Smith, BNY Mellon's head of Asset Servicing for the Americas. "DB plans typically outperform DC plans, sometimes by as much as two percentage points per year. That's an important motivator for DC retirement plans to offer asset classes their investors haven't been able to access in the past. By adding alternatives to their plan, sponsors can provide participants with downside or inflation protection."

In looking at the future direction of DC plans, 55 percent of plan sponsors identified providing retirement income as an important priority. While the paper notes that some plans have achieved this by working with insurance providers to wrap annuities into custom target date funds, it also points out there is considerable uncertainty by DC plan participants of the level of assets they need to acquire and how that translates into retirement income.

"In fact, most employees participating in DC plans are allocating between three and six percent of their salaries, which happens to be the default range on many auto-enrollment DC plans," said Rob Phillips, senior vice president, Consultant Relations at ‪BNY Mellon Investment Management. "However, 10 percent is a more realistic number to help employees attain their retirement funding goals."

BNY Mellon's Asset Servicing business supports institutional investors in today's fast-evolving markets, safeguarding assets and enhancing the management and administration of client investments through services that process, monitor and measure data from around the world. We leverage our global footprint and local expertise to deliver insight and solutions across every stage of the investment lifecycle.