RETIREMENT FINANCES
Defined-contribution plans growing, improving
Once just a supplement to the pension system, defined-contribution plans such as 401(k)s are growing and changing fast as they evolve into a linchpin of Americans’ retirement savings and offer increasingly innovative investment options, a new study indicates.
Boosted by a widespread shift to automatic enrollment and other factors, the defined-contribution market is estimated by McKinsey & Co. to double in size by 2015 to $7.5 trillion to $8.5 trillion in assets under management.
That will make it three times larger than the once-dominant market for defined-benefit pensions, the consulting firm found in the study released last week.
The changes and expanding market should be good news for beleaguered consumers, forced to increasingly fund their own retirements in an era of vanishing pensions and shrinking Social Security funds. McKinsey says the increased options bring not only a wider range of choices but more opportunities to obtain investment-related advice and invest in lower-fee funds.
“The confluence of changes we are seeing in the market is signaling huge progress toward increasing the retirement readiness of the broader U. S. population,” said Onur Erzan, one of the report’s authors. “Defined-contribution plans are playing a much more critical and increasingly bigger role in that.”
The findings also defy the notion that the defined- contribution market will decline when baby boomers retire. The analysis, based on interviews with dozens of experts and McKinsey’s modeling, concludes that the flow of more than $3 trillion out of defined-contribution plans will be more than offset by growth opportunities.
Reliance on defined-contribution plans has grown as companies have eliminated traditional, defined-benefit pensions. Congress helped spur defined- contribution plans’ growth in 2006 with the Pension Protection Act. The act removed barriers that prevented companies from automatically enrolling their employees and also increased employees’ access to professional advice about investing for retirement.
McKinsey cites “spectacular growth” in the offering of fund products such as asset allocation funds — primarily life-cycle or target retirement date funds — balanced funds and managed account programs.
