US$52.5 trillion — that’s the value of global institutional pension fund assets in 2020, an 11% increase over the previous year despite the pandemic. Today, pension fund assets are typically held in two forms: Defined Benefit (DB) and Defined Contribution (DC). For the uninitiated, the Defined Benefit is the kind of plan where the employer/sponsor promises a pre-defined amount on retirement. Defined Contribution is when the employer, employee, or both contribute to the retirement account. So, In DC plans, benefits are dependent on the total Contribution and investment performance, unlike DB plans, which offer fixed benefits.
Globally, employers/sponsors are moving towards the defined contribution model for various reasons.
Increased costs of DB plans. The workforce has aged and the post-retirement period has grown. This means that the cost of funding a DB plan has risen too. Moreover, employers are spending more to adjust compensation in response to evolving needs, adding to the cost of plan management.
Tax and regulatory changes. In the US, in 1974, the Employee Retirement Income Security Act (ERISA) imposed a complex set of rules controlling almost all aspects of private pensions. In addition to ERISA, the Pension Benefit Guaranty Corporation (PBGC) and the Pension Protection Act of 2006 (PPA) also brought about significant changes to US pension plan laws and regulations. Similar changes to the law have happened across the globe. These regulatory interventions make it difficult and more expensive to manage DB plans, ushering sponsors towards DC instead.
Logistical complexity of DB plans. Given DC plans move much of the onus of saving and investing to the employees themselves, the cost of managing these pension plans is lower for employers.
Labor mobility. Today, job switching every few years is a norm, and younger employees prefer a plan that is easily portable and accrues evenly over the years even if they decide to leave their present firm. This is unviable in DB plans, making employees prefer DC as well.
401(k) and its tax benefits, a better understanding of the stock markets among employees, and the evolving nature of pension accounting have let DC be the preferred pension plan, not just in the US but across the globe.
Assets in DC and personal plans increased faster than in DB for 14 out of 19 countries, with the largest pension markets being Australia, USA, UK, Ireland and Netherlands.
In Australia, for instance, DC accounts for 86% of their pension fund assets. In the US, it is at 64% of the total asset size reaching 9.64 trillion USD in 2020. In the UK, the pensions regulator proposes to migrate to DC over the next 15 years. In the Netherlands, too, DC pension plans are gaining more ground, with the Dutch cabinet intending to phase out DB plans completely by 2026 and move to a new, obligatory DC system. India’s National Pension System (NPS) lets employees make defined, voluntary contributions towards retirement. Though the NPS was initially meant only for government employees, it was thrown open to all citizens in 2009.
Despite this steady shift in employer and employee preferences for defined contribution plans, organizations are unprepared to execute them effectively. The biggest challenges are often technological.
The huge volume and variety of data from plan sponsors and providers containing contribution details are stored in disparate systems and formats. Reconciling this information and processing it to ensure that contributions happen accurately and effectively is a mammoth task.
Sponsors, providers and administrators need data management tools to bring this information together for efficient processing and meaningful insights.
This data management problem is further complicated by the industry’s dependency on siloed and legacy systems. This limits an organization’s ability to scale and adds significant maintenance costs to the top line.
Players in the retirement plan industry must leverage cloud-native applications to bring down infrastructure costs and scale dynamically as the need be.
Employee expectations have skyrocketed — they demand hyper-personalized digital experiences the way they do from the Facebooks and Googles of the world. They want more choice and control over their retirement funds. They seek the ability to keep a closer eye on their investment performance, ensuring their retirement readiness.
To entice millennials, Gen Z-ers and future generations into retirement planning, the industry must make it attractive, engaging and even enjoyable.
Compliance will always be critical to success in highly regulated industries like the retirement plan. Not only will the federal, state and local laws be applicable, they will also evolve more rapidly in the post-pandemic world.
Plan sponsors, providers, and administrators need agile technology and resources to adapt to these evolving rules.
But before all that, to transition seamlessly to defined contribution models, plan sponsors need to choose the right DC plan and set it up for success. This involves identifying suitable plans, defining its goals, fiduciaries such as admin, trustee custodian advisor etc.
To make this transition efficient for the organization and effective for employees, you need a robust combination of technology strengths and domain expertise. At Congruent, we bring both.
Our CORE platform enables you to easily manage your retirement plans, as we take care of the technology foundation, infrastructure and data security. It is built on microservices architecture to optimize cost-efficiency and performance. Its mobile-first UI offers an intuitive, seamless experience to your customers.
Our consulting teams can manage payroll, enrollment and distribution as well.