Tips for DC plan design

As more plan sponsors consider introducing defined contribution plans, Towers Watson encourages the deliberation of plan design, with the ideal scheme encouraging engagement, managing savings rates and investment elections as well as expenses and communication.

Towers Watson says to be successful a defined contribution plan must consider and manage participant engagement, savings rates, investment elections, employer contributions, distribution strategies, plan expense, and communication and education solutions.

Many plan sponsors fall short of their potential to deliver benefits despite apparent success in one of these areas, Towers Watson says.

To better understand what employers are doing to improve the success of DC plans during the past year, it surveyed 334 plan sponsors with combined assets of $386 billion, about 30 per cent of which had assets above $1 billion.

The survey found that many plan sponsors have attempted to better engage participants by designing DC plans that encourage participation, promote higher saving rates and educate employees about their investments.

It found that plan sponsors offering auto-enrolment have a much higher participation rate than those that don’t. Many plan sponsors that offer auto-enrolment also automatically escalate the contribution rate.

According to the survey, most plan sponsors are also offering a matching contribution which has been successful in improving participation because employees view it as an enticement.

But despite the positive impact of participation as a result of adopting certain plan design features, Towers Watson says further improvements are still needed if “DC plans are to fulfil their promise as an appropriate vehicle for retirement savings”.

“The practice of allowing plan design to shape and develop employees’ retirement plans has its limitations.

“This is because planning for retirement cannot be uniform for all employees, and employees are not always engaged. To ensure participants are on the road to success, plan sponsors must continue to provide information to help participants gauge how much they’ll need in order to meet their personal needs in retirement. Ensuring that participants have an arsenal of tools to effectively manage their retirement finances should be a near-term priority for employers.”

To access the full survey click here