Wake Up and Smell the Coffee! DC Plans Aren't Working

Abstract

Defined-contribution plans are not meeting the goal of enabling employees to save enough to retire. Improving them involves a savings component, an investment component, and a payout component. To encourage savings, employers can use behavioral strategies such as a high default savings rate and auto-escalation. The investment component should center on pre-mixed asset allocation funds built of index funds and carefully selected active funds. Payout options should include annuities, which enable the employee to convert savings to a guaranteed lifetime income as in a defined benefit plan.