Towers Watson: Defined Contribution Enters a New Era

LONDON & NEW YORK--(EON: Enhanced Online News)--Defined contribution (DC) retirement plans require significant re-engineering if they are to better serve millions of individuals worldwide who were exposed to their failings during the financial crisis according to a new publication from global professional services company Towers Watson (NYSE, NASDAQ: TW). The publication, entitled Journey well, arrive better, reveals why participants have felt the full force of investment risks and exposes the many weaknesses which fiduciaries need to address to restore trust in DC.

“There is no doubt that being a participant in, or a fiduciary of, a DC plan is challenging, but more thinking is producing better practices”

“There is no doubt that being a participant in, or a fiduciary of, a DC plan is challenging, but more thinking is producing better practices,” said Carl Hess, global head of investment at Towers Watson. “Indeed many DC plan participants now realize that they need to better address their own investment risk while plan fiduciaries are reviewing investment strategies and default arrangements to redress the balance of risk and return. Against this backdrop, and with much greater awareness of and engagement with the issues, we are confident that a more robust DC proposition is emerging.”

According to Towers Watson, DC retirement provision is becoming the future dominant form of retirement savings around the world, with DC assets now comprising 42% of global retirement assets compared with 32% in 1999. The company reports that the US, Australia and the UK are leading DC growth and innovation. It also suggests that account-based DB and DC plans are gaining in prevalence and that a significant number of multinationals now have global policies of operating only DC plans, wherever they offer employees retirement savings provisions.

“A really positive development of late is a strong move towards better understanding of the uniqueness of plan participants, their objectives and likely behavior patterns, particularly with respect to investment risk, explained Hess. “This is important for grouping those that will simply follow a default process, those that with guidance are willing and able to make small personalized decisions and those that are able to manage their own choices. An analysis of a specific plan’s participants, its demographics, its likely outcome requirements and its general tolerance to risk is vital when designing investment strategies, including the default, as well as when agreeing to the participant engagement approach.”

In the publication, Towers Watson considers participants’ journey to retirement and how they should be segmented according to their needs by evaluating lifecycle designs which alter their exposure to risk as their human capital evolves. The company also explores three elements of the investment journey: the benefits of diversity in growth assets, suitable matching assets as retirement approaches, and the glide-path design that moves a participant from growth to matching assets over time.

”There are a number of key facets to DC including plan design, investment structures and communications, but unless these are well organized and managed within an effective governance framework they are unlikely to deliver to plan,” said Hess. Governance is the essential ingredient that pulls everything together to make a DC proposition substantially more than the sum of its parts.”

About Towers Watson Investment Services

Towers Watson Investment Services is focused on creating financial value for the world’s leading institutional investors through its expertise in risk assessment, strategic asset allocation and investment manager selection. It is a division of Towers Watson’s Risk and Financial Services business and has over 650 associates worldwide.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.