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Survey Report

Your defined contribution plan has evolved. But what about its investment governance?


April 10, 2018

Today’s DC plans should help participants maximize their savings. It’s up to plan sponsors not only to provide but to help optimize the effectiveness of these plans.
The OCIO model focuses on these four strategies for improved retirement outcomes: speed, depth, potential savings, and streamlined service model.

The role of defined contribution (DC) retirement plans, including 401(k) plans, has evolved in recent years. Instead of being a vehicle to allow employees to save their own money to supplement a monthly pension, DC plans are now the sole retirement source for millions of workers. In fact, many plan sponsors have frozen or even closed their traditional defined benefit (DB) pension plans. This evolution may leave some participants particularly vulnerable if they rely on Social Security as the only source of guaranteed income in retirement. This dilemma may force employees to work longer because they aren’t prepared for retirement, which, in turn, could adversely impact plan sponsors faced with the incremental costs of an aging workforce.

Despite the shift to a more DC-centric world, investment governance structures and processes have been slow to adapt. Typically, DC investment governance mirrors the practices long used by DB plans. For example, DC committees have generally adopted the strategy used by pension plans, which focuses on the benchmark-relative performance of their investments. However, investment performance is only a small part of what could ultimately lead to sustained success of DC plans, now that they are the primary retirement vehicle offered in the workplace. Instead, sponsors should focus more broadly on aligning plan design, communications and investment design to help ensure that participants are leveraging their DC benefit in the most efficient way. In our view, the end goal for the plan sponsor should be the creation of a fully funded retirement stream of income for participants.

The 2017 Willis Towers Watson U.S. Defined Contribution Survey indicates that retirement readiness is the top priority for large plan sponsors, yet committees spend a majority of their time discussing plan investments. As the first generation of workers to rely heavily on retirement savings from DC plans reaches retirement age, it’s becoming increasingly clear that committees’ current investment-centric approach to plan governance may not yield the best outcomes for participants. With more employees falling short of their retirement goals, there is a ging realization among plan sponsors that they need a more proactive and forward-looking approach to managing their DC plans.

Changing goals and changing governance

DC plan sponsors generally have three key goals for their plans.

DC plan sponsors' three key goals: retirement readiness, risk management, and plan effectiveness

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