The Defined

Contribution
Plan of the Future
Improving Outcomes Through Retirement Income Options

September 2020
Table of Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Changing Retirement Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Offer Better Retirement Income Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Case Study: How a University Created a Retirement Income Plan. . . . . . . . . . 7

4 Steps to Implementing Retirement Income Solutions . . . . . . . . . . . . . . . . . . . . . 8

More to Come: Additional Opportunities as DC Plans Evolve. . . . . . . . . . . . . . . 10

The Defined Contribution Plan of the Future 2

For the past 40 years, plan
sponsors have focused on
making defined contribution (DC)
plans reliable vehicles for their
employees to build a nest egg.
As defined contribution plans have replaced
defined benefit plans for many employers,
defined contribution plans have evolved from
being an option to help employees make it to
retirement to one that will take them through
retirement. This change in philosophy means
that plan sponsors will have to rethink their
approach to employee needs, retirement
income, and plan design.

This paper highlights how Aon believes the defined

contribution plan will transform over the next decade.
How can plan sponsors best embrace change in a
financially efficient way that improves the retirement
futures of their employees?

The
TheDefined
DefinedContribution
ContributionPlan
Planofofthe
theFuture
Future 2
The Changing
Retirement Landscape
The future of retirement is changing both
from the employee and employer perspective.
Plan sponsors recognize that retirement
means something different to each employee 42%
and that workers will transition to retirement
more gradually.
42% of employees
More than 40% of employees expect to work part-time before they
of employees expect
fully retire.1 Employers want their plans to keep pace with the dynamic
to work part-time
retirement needs of their workforce, which is why almost 3 out of 4
before they fully retire
plan sponsors allow employees to take partial distributions during
retirement, and about another 60% of those include plan distribution
options that payout over a fixed number of years.2

1
Aon, Living the Dream - DC and Financial Wellbeing Employee Survey, 2018
2
Aon, Driving DC Plan Success - Defined Contribution Employer Survey: Aon recently surveyed HR managers,
fiduciaries, finance officers, and other professionals from 142 companies across a wide range of industries and
plan sizes. The survey revealed employer acknowledgement of employee retirements savings needs and
trends in DC plans.

The Defined Contribution Plan of the Future 3

Offer Better Retirement
Income Options
Managing assets through retirement is a
daunting task, and participants have a strong
desire for retirement income solutions.

Aon found that 80% of employees want some form of guaranteed

income in retirement.3 This challenge underscores the need to
introduce plan features more common in defined benefit plans. We have found that
Employers recognize this and want to do more. More than 70% of 80% of employees/
plan sponsors agree their DC plan should include lifetime income participants want some
options.4 Now is the time to align their actions with their goals. form of guaranteed
income in retirement.
The SECURE Act of 2019
Retirement Income Today expands opportunities
to increase retirement
Employers recognize that defined contribution plans are now an
savings, provides a clearer
employee’s primary source of retirement income, given the decline
safe harbor for selecting a
of defined benefit plans. Plan sponsors have spent the last two decades
lifetime income provider
simplifying their defined contribution plan investment menu to help
in defined contribution
participants save more and invest better with target date funds.
plans, and improves the
Plan design will be crucial to providing more retirement income portability of lifetime
options. Historically, defined contribution plans only offered lump sum income options from one
distributions. Once employees terminated service, they were forced to plan to another. Taking
take their money out of the plan, whether it’s immediately or years later. advantage of these
In the through retirement plan ecosystem, sponsors allow participants expanded options is an
to set up a monthly retirement income stream, take ad hoc distributions, important step in offering
or schedule distributions over a certain number of years. some form of guaranteed
income in retirement.

Aon, Living the Dream - DC and Financial Wellbeing Employee Survey, 2018
3

Aon, Driving DC Plan Success - Defined Contribution Employer Survey, 2020

4

The Defined Contribution Plan of the Future 4

More than 2 out of 3 employers offer employees access to
expert financial advice within or outside of managed accounts.5
However, most participants don’t engage enough with the
managed account provided to get the many benefits from
personalization. Further, employers are less focused on
providing managed account options with a drawdown feature.
Fewer than one-third of employers currently offer the draw
down feature to help employees systematically withdraw plan
balances during retirement.
Although Aon has seen price compression in managed accounts
recently, in most cases, the cost remains high relative to the
benefits. If fee compression continues and/or participants
increase their engagement with these technologies, managed
accounts may become advantageous in more situations. In the
meantime, plan sponsors may need to reconsider how they
provide advice to participants during employment and after
they leave.
Most employers offer limited access to annuity or insurance
products, either within or outside of the defined contribution
plan. The next life stage of the plan will require increasing the
focus on offering the appropriate retirement income solutions
without confusing participants.

Aon, Driving DC Plan Success - Defined Contribution Employer Survey, 2020

5

The Defined Contribution Plan of the Future 5

As shown in the following exhibit, the industry is moving from a single
savings phase to a more comprehensive strategy that considers both the
savings and spending life stage phases. These two phases will have three
overarching investment tiers:
• Tier 1 is professionally managed solutions
• Tier 2 is broader access
• Tier 3 is focused access

The result is that professionally managed investments will play a role

in both the savings and spending phases of a participant’s life stages.

INVESTMENT TIERS

LIFE STAGE PHASES

1 Professionally
Managed 2 Broader
Access 3 Focused
Access

Passive Active
Savings Management Management
Phase

Target Date Funds/

Managed Accounts

Multi-Asset Investments Annuity Products

Spending (Self-Insured) (Pooled Insured)
Phase

The Defined Contribution Plan of the Future 6

CASE STUDY:

How a University Created

a Retirement Income Plan
This university’s objective is to help participants fund
their plan in a way that focuses on secure retirement
income, similar to what defined benefit plans provide.
By incorporating an institutionally-priced insurance solution within a target date
fund, it provides access to a defined income source backed by a third-party
insurer. In addition, this design outsources the defined income without the
balance sheet risk of a defined benefit plan.
Aon helped the university access institutionally-priced insurance solutions in a
way that refocuses the defined contribution plan’s goal from being a savings plan
to a retirement income plan. This solution can be offered to employees at many
universities and non-profit hospitals.

Innovation in Target Date Funds Back to the Future

The plan and Aon used existing recordkeeping The 403(b) plan often is regarded by many in
technology to design a solution that operates like the industry as outdated. By rethinking the role
a target date fund with an allocation to secure annuities can play in these plans, Aon made the
income. The plan provides secure income to 403(b) new again and continues to revamp 401(k)s
participants by accessing an institutionally-priced and other defined contribution plans to make them
fixed annuity, which works like a defined benefit more relevant to participants. This redesign is just
plan and builds up units of guaranteed retirement another brick in the road for more evolution among
income the longer a participant saves in the plan. defined contribution plan sponsors.

The Defined Contribution Plan of the Future 7

4 Steps to Implementing
Retirement Income
Solutions
Recent Legislation and
Impact on DC Plans
The defined contribution plan of the future will
The Coronavirus Aid, Relief,
adopt some features of a defined benefit plan. and Economic Security
You could call it “defined income,” where the (CARES)Act is a $2 trillion
employer establishes the contribution structure stimulus bill passed by
Congress and signed into law
and has vehicles that are targeted to produce in response to the economic
some levels of income. impact of the global
Coronavirus pandemic.
The Setting Every Community
STEP 1: STEP 2: Up for Retirement
Enhancement (SECURE) Act
Start Simply by Activate a Retirement of 2019 is a law designed
Offering Periodic Income Projection
to encourage retirement
Withdrawals Feature for Participants
savings and improve
retirement security. The
legislation provides updates
on plan design changes,
lifetime income, Pooled
Employer Plans (PEPs), and
The defined
nondiscrimination testing.
contribution plan
of the future Both the SECURE and
CARES Acts provide new
STEP 4: STEP 3: rules around loans, early
withdrawals, and required
Add Access to Expand the Core Lineup
Institutionally-Priced to Offer Multi-Asset minimum distributions. Plan
Insurance Solutions Solutions with an Annual sponsors should carefully
Spending Objective review what changes are
required or recommended
for their plans, and work with
recordkeepers to implement.

The Defined Contribution Plan of the Future 8

 4 Steps to Implementing Retirement Income Solutions
STEP 1:
Start Simply by Offering Periodic Withdrawals
Employers can enhance withdrawal plan design options, such as allowing
partial distributions to ensure participants are provided the ability to create
a retirement income stream.

STEP 2:
Activate a Retirement Income Projection
Feature for Participants
Plan sponsors should explore different ways to provide retirement income
modeling tools to support participants planning for their retirement income needs.
Aon estimates the average employee needs 11.1 times their final pay to prepare
for an adequate retirement at age 67.6 Each employee’s need is different, and
retirement income projection tools can help them make better financial decisions.

STEP 3:
Expand the Core Lineup to Offer Multi-Asset
Solutions with an Annual Spending Objective
Employers can simply provide a comprehensive approach to retirement income
by pairing our first two steps together with offering a multi-asset investment
solution that offers post-retirement spending guidance. That is, investors can use
a projection tool to set the participants’ appropriate spending goal, implemented
with systematic partial withdrawals and a multi-asset investment solution. Plans
should provide participants lifetime income spending advice, per the DOL
guidance,7 using an in-plan annuity assumption. Plans should also consider how
that advice changes when you substitute the annuity for an in-plan TDF or multi-
asset solution.

STEP 4:
Add Access to Institutionally-Priced Insurance Solutions
Reasonably priced insured products allow participants to hedge longevity
risk. These solutions can be added directly in the plan, as an asset allocation
enhancement within a target date fund solution, or out of plan as an extension
of a recordkeeper’s offering through an annuity platform. Importantly, plan
sponsors can often provide access to products with much lower fees than
participants could get on their own in the retail market.

Aon, The Real Deal: Retirement Income Adequacy Study, 2018

6

On August 18, 2020, The Department of Labor released an interim final rule that DC plan sponsors governed by ERISA must provide
7

participants with an annual lifetime income disclosure and convert participants’ account balances into monthly income streams
upon retirement. This rule developed after the SECURE Act was passed in December and required the DOL to issue a final rule.

The Defined Contribution Plan of the Future 9

MORE TO COME:

Additional Opportunities
as DC Plans Evolve
Although we believe that retirement income
solutions are the way that plans will most
critically change to provide participants a
through retirement solution, there are other
trends plan sponsors are considering.

Health Savings Pooled Employer Plans Open Architecture in

Accounts as
Investment Options
HSAs can be used as a savings
and investment vehicle
to supplement defined
contribution plans and prepare
employees for out-of-pocket
medical expenses. The greater
availability of investment
options for HSAs may mirror
those available in defined
contribution plans and quickly
become the employee’s
primary retiree health benefit.
With the passing of the SECURE
Act in the U.S., employers will
no longer need to sponsor
their own individual 401(k)
plan. An alternative solution
is now possible if employers
pool resources together.
Joining a pooled plan with
other employers can increase
efficiency, reduce risks, and
create better outcomes for
participants.
Multi-Asset Funds
Target date funds and
other multi-asset solutions
are typically filled with all
proprietary products from the
underlying asset manager. This
approach limits the quality of
the active management and
range of asset classes available.
Open architecture structures
to allow different managers for
different mandates will become
more common for multi-asset
funds as they are for most
other types of institutional
investments.

The Defined Contribution Plan of the Future 10

Conclusion: Retirement and Beyond
As plan participants’ needs transform from to retirement into a
comprehensive through retirement program, we expect that plan
sponsors will also be making changes to evolve to meet these needs.

Innovations Actions

Offer Better • Start simply by offering periodic withdrawals

Retirement Income • Activate a retirement income projection feature for participants
Options • Expand the core lineup to offer multi-asset solutions with an
annual spending objective
• Add access to institutionally-priced insurance solutions

Reevaluate Plan • Integrate health savings accounts and retirement planning

Design and Investment • Outsource plan management functions
Options • Consider pooled employer plans
• Transitionto an increased use of open architecture
in multi-asset funds

These actions can create the defined

contribution plan of the future that
fully supports participants through
retirement. Aon is here to guide plan
sponsors as the DC landscape continues
to shift, and these innovations become
a reality for DC plan participants.
For more information about defined contribution plans,
please visit Aon’s insights hub

The Defined Contribution Plan of the Future 11

For help determining how to transform your defined contribution plan,
please contact your Aon consultant or:

Beth Halberstadt
U.S. Defined Contribution
Investment Solutions Leader
Aon Investments USA Inc.
+1.781.906.2386
beth.halberstadt@aon.com
Bill Ryan, MBA, CAIA, SPHR
Head of North America
DC Multi-Asset Solutions
Aon Investments USA Inc.
+1.312.381.5022
bill.ryan@aon.com
Melissa Elbert, FSA, EA
Retirement Solutions
Aon
+1.312.381.4882
melissa.elbert@aon.com

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