Can You Get the Best of DB With the Best of DC? | Capital Group

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Investment Insights

May 2015

Can You Get the Best of DB With the Best of DC? Ideas for “DB-izing” a DC Plan

Why DB-ize?

The decline of defined benefit plans and the rise of defined contribution plans have created dilemmas for both plan sponsors and participants. Although they had their own disadvantages, DB plans make saving fairly easy for participants; DB participants are automatically enrolled and don’t have to make any investment decisions. With the growth of DC, much of that responsibility has shifted to participants, with mixed results. However, there are steps DC plan sponsors can take to seek the best of both the DB and DC worlds. By incorporating aspects of defined benefit plans into a DC plan design, plan sponsors can strive to address the following problems that many DC participants face:

  • Low enrollment
  • Inadequate contribution rate
  • Inappropriate asset allocation

Nine Steps to DB-izing a DC Plan

  1. Automatic enrollment: Behavioral finance research shows that it is essential to encouraging participation. Don’t set the default contribution rate too low. Many plans are auto-enrolling at a 3% default rate. That’s likely to be inadequate to generate sufficient savings in retirement.
    Tip: Auto-enroll at 6% or more.
  2. Automatic escalation: Participants are unlikely to revisit their contribution rate on their own. Automating is key.
    Tip: Auto-escalate at 3% or more.
  3. Thoughtfully select and evaluate a QDIA: Target date funds, balanced funds and managed accounts are options.
    Tip: Consider employee demographics, fees and the asset-class mix at retirement.
  4. Re-enroll participants: Many participants do not know how to appropriately invest. Re-enrolling into a QDIA can help address that problem.
    Tip: Have participants reconfirm their investments. Communicate the process thoughtfully and frequently to ensure success.
  5. Streamline the number of investment options: Research shows that offering too many options can paralyze participants. Reduce the number of options.
    Tip: Consider reorienting the lineup based on the three tiers in the following hypothetical example.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the funds’ characteristics statement, which can be obtained from a financial professional or your relationship manager, and should be read carefully before investing.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. While not directly correlated to changes in interest rates, the values of inflation linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Bond prices and a bond fund's share price will generally move in the opposite direction of interest rates.

Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks.