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‘Weakly Designed, Untidily Executed’ — And Bigger Than Ever

Defined contribution gets called out by Willis Towers Watson.

There is now more money in defined contribution plans than in traditional pension funds across the largest markets, new figures released Monday show.

DC is bigger, but often isn’t better than the defined benefit system it’s replacing, according to Willis Towers Watson, which produced the data for its annual global pension study.   

“We’ve reached a pivotal moment in the DC pension assets growth story, as they exceed DB pension assets for the first time, after a slow and steady grind over 40 years,” said Steve Carlson, Willis Towers Watson’s investments head for North America, in a statement. “But despite its long history, DC is still weakly designed, untidily executed, and poorly appreciated.” 

The DB/DC tipping point happened last year in what WTW calls the “P7”: Australia, Canada, Japan, the Netherlands, Switzerland, the U.K., and U.S. These seven countries account for the vast majority of global retirement capital, and 91 percent of the assets in the study. 

The U.S. was the world’s largest market at $24.7 trillion in 2018. DC vehicles such as 401(k) and 403(b) plans held 62 percent of the nation’s retirement money, and are only expected to widen their lead over time. 

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As Americans rely more and more on DC plans to get them through old age, experts are sounding alarms about the quality of the system, which puts participants in charge of portfolios.

“Now that the shift [from DB to DC] has materialized in a significant way, it begs the question: how do you introduce sophistication into DC, while also keeping DC participants safe from themselves?” John Galateria, Invesco’s institutional chief for North America, told Institutional Investor. Upgrading the system “has been happening a lot slower than the industry expected.”

The U.S. should look to Australia as a role model, suggested WTW’s John Delaney. “Australia has this set up correctly, because they have broader ways to access markets,” said Delaney, a senior director for investments, in a phone interview. “In the U.S., you have target-date funds, and then equity, core bonds, and cash. It’s more of a retail investment focus. That keeps the U.S. from keeping up with Australia.” 

Real estate, infrastructure, private equity, and the like buoyed pension portfolios in 2018, the report said, but are broadly inaccessible to American DC investors at reasonable fee levels. 

In Delaney’s view, “the U.S. is missing the downside protection that alternatives bring.” 

Staff writer Julie Segal contributed reporting. 

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