The Future of DC Retirement Plan Design:
Optimism Fueled by Recent Accomplishments and Regulatory Approach Supportive of Innovation
By John Mitchem
The Georgetown University Center for Retirement Initiatives (CRI) annual Policy Innovation Forum is a hotbed of ideas centered on workplace savings plan coverage, plan design, investment strategies, asset allocation, emerging technologies, and more. Blending policy-makers, financial practitioners, academics, and lawyers, and held a short walk from the U.S. Capitol, it hones in on the means by which public policy defines the shape of the world’s largest retirement savings system.
At this year’s invitation-only Forum, I was honored to moderate a look-forward session on innovation with a shortlist of visionary thinkers: a leading policy-maker, one of Washington’s best-known benefits/ERISA attorneys, and leading practitioners from among the world’s largest asset managers. Here are some of my takeaways from the discussion.
A Palpable Optimism Fueled by Accomplishments
The United States lives in an age of contentious politics that constantly pulls at the seams of public policy, but when it comes to retirement policy and practice, there is a track record of bipartisan collaboration and bold, measurable innovation. These include:
- Embracing innovative design features from auto-enrollment and auto-escalation to well-thought-out investment defaults, including qualified default investment alternatives (QDIAs) and qualified longevity annuity contracts (QLACs) — all amid steadily falling fees and expenses.
- Harnessing economies of scale through pooled employer plans (PEPs) that promise to de-fragment plan sponsorship. While PEPs can offer the promise of efficiency, they also may make regulatory oversight easier by allowing the Department of Labor to focus on dozens of PEPs rather than on tens of thousands of individual employer-based plans. It was noted that defined contribution savings plans in the UK and Australia had long ago opted for pooled plans over single-corporation plans.
- Expanding access through new state-facilitated workplace Auto-IRA programs enrolling workers who have never saved for retirement. Auto-IRAs promise to cover several worker cohorts — part-time workers, workers in small companies, women, older and younger workers, immigrants, and ethnic minorities — that have long been underrepresented in workplace plans. Since their launch in 2017, these plans have accumulated more than $500 million in assets in more than 500,000 individual accounts, most of which are owned by workers in small businesses, often low-wage, who have never participated in a payroll deduction retirement savings plan.
However much they might want to innovate, plan professionals face an inherent challenge in the complexity of a plan ecosystem composed of many “moving parts”: savers, plan sponsors, record-keepers, third-party administrators (TPAs), and asset managers. And, of course, there are consultants (at multiple levels), technology vendors, and financial advisors for both individuals and for plans. Nevertheless, innovations in plan operations and technology resulted in the total cost of American workplace savings plans dropping by 20% between 2009 and 2018.
New Market Dynamics and Innovations on the Horizon
The rise of workplace savings in the United States coincided with a multi-decade decline in interest rates and equity beta rally. But rising inflation and interest rates over the course of 2022 present new challenges for saving, investing, and generating and protecting lifetime income.
What are some of the focal points for innovation on the horizon? Here’s what to watch for.
- Auto Portability. There must be a seamless ecosystem in which workers can shift between workplace 401(k) or Auto-IRAs in a way that automatically migrates their savings as they move between jobs and significantly reduces the amount of leakage in the system. Facilitating portability of assets between retirement accounts could result in more than $100 billion annually in preserved savings.
- Private Market Assets. Private assets in America have grown by $3 trillion over the past five years; in 2021, fully 35 percent of investment capital was raised privately compared with 20 percent a decade ago. To some degree, workplace defined contribution (DC) plans are playing catch-up. Defined benefit (DB) pension funds, sovereign wealth funds, and ESG investment portfolios have long allocated substantial portions of their funds beyond the traditional “long” stock and bond markets that have dominated DC savings plans.
- Lifetime Income. This has to be the next great phase of workplace savings innovation. This does not imply only that workers will annuitize upon retirement. There are multiple formulas for turning accumulated assets into income, and more on the way. Participants and sponsors will be able to pick and choose via more-personalized savings plans.
The Roles Litigation and Regulation Play Shaping the Future of Innovation
In the United States, ERISA can be considered a measurable success by virtue of the fact that in only a generation, the retirement finance system has accrued some $34 trillion and helped tens of millions of families to supplement their Social Security benefits with private retirement savings. As a practical matter, much of the enforcement of this regulatory system has been effectively carried out in the courts via ERISA-related civil actions. There is general concern in the industry that plan sponsors may be holding back on innovation to avoid getting sued.
We often hear that the pace of innovation in workplace savings is too slow. For example, the industry has been urgently discussing the challenge of lifetime income for decades. While there are frustrations over the speed at which ideas evolve into best practices, it is worth recalling that an industry dedicated to managing other people’s money should move at a “measured” pace. Since its inception, when ERISA was first conceived, it has always been clear that companies sponsoring plans must serve as fiduciaries — and that associated responsibilities were not to be taken lightly.
While many lawsuits undertaken in the context of these fiduciary obligations seem spurious, it is also worth recalling that 20 years ago, many very large workplace plans were investing in high-fee retail investment funds and civil actions played a salutary role in urging best practices, which in turn led to steadily falling expense ratios. Litigation has driven billions of dollars of expenses out of plans, leaving more money in the pockets of tens of millions of savers. The challenge today is to create an approach to regulation that can embrace and encourage innovations that have been percolating for years — PEPs, lifetime income, or including private market asset allocations in plans — and allows new ideas to be tested and adopted while adhering to fiduciary responsibilities and duties.
There is reason for great optimism about the future of the U.S. retirement system. There is still much work to be done, but the level of bipartisan support and consensus around the need for change points to continued forward progress.
John Mitchem is Principal of JM3 Projects, a global financial industry consultancy, and collaborated with Bob Reynolds, CEO of Putnam Investments, on his book From Here to Security: How Workplace Savings Can Keep America’s Promise. In 2022, with Jorik van Zanden of Utrecht University (Netherlands), he founded the Jasper Forum, a global discussion group focused on defined contribution workplace savings. The author thanks Angela Antonelli for her contributions to this post.
October 2022, 22-06
Georgetown Center for Retirement Initiatives, Securing a Reliable Income in Retirement – Is It Possible to Build a 21st-Century Personal Pension?, June 2022.
Brookings Retirement Security Project, How Auto-IRAs Could Soon Improve Retirement for Millions of Americans, October 2021.
Cerulli, Pooled Employer Plans — The Next Big Thing? March 2021.
Georgetown Center for Retirement Initiatives, State Benefits of Expanding Access to Retirement Savings, February 2021.
Brookings Retirement Security Project, A Retirement Dashboard for the United States, October 2020.
Georgetown Center for Retirement Initiatives, Use of Alternative Assets in Target Date Funds: Challenges, Strategies, and Next Steps, February 2020.
Georgetown Center for Retirement Initiatives, Auto Portability: What is it, Why It’s need and How it Will Strengthen Retirement Security, January 2020