By Randy Myers
When defined contribution retirement plans started to become popular in the 1980s, they were viewed primarily as a supplement to defined benefit pension plans. But over time, many employers stopped offering DB plans in favor of DC plans, making the latter the principal retirement savings vehicle for most employees. Today DC plans continue to evolve, says retirement researcher Rob Austin, and at many companies are now becoming just one component of broader financial wellness programs.
Austin is vice president and head of research, wealth solutions and strategy, for Alight Solutions, which provides a variety of services for employers, including 401(k) retirement plan recordkeeping services. Speaking at the 2023 SVIA Spring Seminar in May, Austin provided an overview of how defined contribution plans have evolved over the past four decades and where they’re heading now. Greater personalization of products, he said, is a key new trend.
In 2000, Austin said, the average defined contribution plan had a 74% participation rate among employees. Those plan participants on average saved 7.7% of their salary, invested 81% of their account assets in equities, and had an average account balance of $53,000. Twenty-three percent had taken loans from their plan.
Thanks in part to a legislative initiatives aimed at making defined contribution plans work better for participants, including the Pension Protection Act of 2006 and the SECURE Act of 2019, most of those statistics have now improved. Today, Austin said, the average participation rate has risen to 83%, the average savings rate is up to 8.3%, and the average account balance has grown to $111,000. The percentage of plan assets allocated to equities has fallen to 78%, and the percentage of participants with loans is down to 19%.
Still, DC plans aren’t yet perfect. If forced to say in one word how the shift from DB plans to DC plans has worked out, Austin said he’d answer “good.” If forced to answer in two words, he’d say “not good.” Common complaints are that DC plans simply haven’t allowed workers to keep up with where they would have been if they’d had a defined benefit pension plan, in part because workers aren’t saving enough.
Many workers aren’t saving enough, Austin conceded, but he said it’s hard for many of them to set aside as much as they should. Some struggle to balance saving for retirement with funding day-to-day needs. In a survey, more than a third said they’re intimidated by financial matters, and almost half said they get stressed when thinking about financial planning. Thirty percent said their level of debt is ruining their quality of life.
Findings like these, Austin said, have convinced growing numbers of retirement plan sponsors to expand their benefits offerings beyond a defined contribution plan to include other programs and services aimed at improving workers’ overall financial wellbeing. (Examples of such programs and services can include things like emergency savings accounts, student loan assistance, financial education and planning, and college fund assistance.) In fact, he said, two-thirds of larger plan sponsors now offer an integrated wellbeing program.
Why are those broader programs popular? Eighty-four percent of employers say offering a broader wellbeing program is the right thing to do. But data from the Federal Reserve indicates that financial wellbeing can have an impact on employees’ physical and mental wellbeing, too, which can have implications for employers. Owing to cost concerns, a Fed survey found, 17% of people say they’ve skipped dental care, 13% have skipped seeing a doctor or specialist, 8% say they’ve not taken prescribed medicines, 8% have not taken advantage of follow-up care, and 7% have foregone mental health care or counseling. When employees compromise their physical and mental health, it can have an impact on their engagement and productivity at work—and on their employers’ health care costs.
Moving forward, Austin anticipates that employers will be increasingly interested in offering employees personalized benefits tailored to their unique needs. In a retirement plan, that might mean target-date funds or managed accounts that can reflect each plan participant’s individual risk and performance objectives.
Austin also predicted that plan sponsors will become increasingly likely to offer employees lifestyle spending accounts—money employees can use on whatever benefits are most important to them. He cited research by benefits consultant Mercer which found that 10% of surveyed employers offer such accounts today and 70% are considering them. Most adopters are larger plans, Austin said.
“This is where I think we’re headed,” Austin concluded, referencing lifestyle spending accounts. “Is that tomorrow? No. Is it five years? Maybe. Ten years? I think probably. It’s the ultimate in personalization.”