Key Strategies for Accumulation and Decumulation in DC Plans

Defined contribution (DC) plans play a vital role in helping individuals prepare for financial security in retirement. As the landscape of retirement planning evolves, plan sponsors must carefully consider the investment lineup offered to participants. This involves not only supporting asset accumulation but also providing strategies and products that help participants convert their savings into sustainable retirement income. The following overview explores essential considerations for DC plan investment lineups, with a particular focus on decumulation strategies, regulatory requirements, and best practices for educating participants

Customize Investment Options

The purpose of a retirement plan and the demographics of its participants are crucial in determining the types of investments included in a DC plan lineup. Sponsors must understand the investment sophistication of their participant base, as offering too many complex choices can overwhelm those with less experience. For example, unsophisticated participants may not benefit from sector-specific or high-yield funds, while younger populations can focus on accumulation, and retirees require income-generating investments. The use of educational tools can influence how flexible investment options should be.

Multimanager funds and white labeling can simplify choices and reduce style bias, helping participants avoid overtrading and maintain expected outperformance at lower risk. Target-date or target-risk funds are suitable for most participants, especially when combined with auto-enrollment as a qualified default investment alternative (QDIA). Some participants may prefer aggressive asset allocation, so offering a brokerage window may be appropriate depending on demographics. Plan sponsors should use a prudent, in-depth process for selecting target-date funds (TDFs), modeling participant outcomes to age 65. Custom TDFs may offer advantages but come with challenges such as lack of public benchmarks and higher fees.

Decumulation Strategies

As retirement planning continues to evolve, defined contribution (DC) plans have become central to helping individuals secure their financial futures. Traditionally, these plans focused on accumulating assets for retirement. However, there is growing recognition that DC plans must also support participants in converting their savings into reliable retirement income. This shift has prompted plan sponsors to reconsider their responsibilities—not only guiding participants to retirement but also supporting them throughout their retirement years.

DC plans are increasingly viewed not just as vehicles for asset growth, but also as tools to help participants convert savings into sustainable retirement income. Sponsors are exploring ways to meet the needs of former employees, such as offering annuities or investment products with guarantees, and providing educational resources to help retirees understand their options. Bridging the gap between accumulation and decumulation may involve annuity-based products and investment products that allow for regular distributions. Investment lineups should include options that help pre-retirees reduce risk as they approach retirement, such as more fixed-income or lower-risk investments. Many DC plans are under-diversified in fixed income, so sponsors should consider adding these options to better support decumulation needs.

Regulatory Requirements

Plan sponsors must act in the best interests of participants, following fiduciary standards set by ERISA. This includes prudent selection and ongoing monitoring of decumulation products, such as annuities or guaranteed income solutions. Sponsors must ensure that fees associated with decumulation products are reasonable and clearly disclosed, as excessive fees can lead to lawsuits. The SECURE Act introduced a fiduciary safe harbor for selecting annuity providers, reducing liability for sponsors who follow a prudent process. Custom products should be benchmarked against appropriate standards, and sponsors should provide education, guidance, and support to help participants make informed decumulation decisions. Regulatory clarity for ESG investments is also important, as rules in this area are evolving.

Educating Participants

Effective participant education is essential for successful decumulation strategies. Sponsors should provide clear educational materials, interactive tools, workshops, and personalized communications. Leveraging recordkeeper and advisor resources, offering one-on-one support, and using multiple communication channels can help participants understand their options and make informed decisions. Regular engagement and tracking usage of educational resources ensure that participants receive the support they need.

Conclusion

In summary, the design of DC plan investment lineups requires a thoughtful balance between supporting asset accumulation and enabling participants to generate reliable retirement income. Sponsors must tailor investment options to participant demographics, offer a range of decumulation solutions, and maintain compliance with evolving regulatory requirements. Educating participants through clear, accessible resources and ongoing engagement is key to helping them make informed decisions about their retirement. By following best practices and leveraging plan scale, sponsors can deliver better outcomes and greater financial security for retirees.

The role of DC plans is expanding beyond simple asset accumulation. Today, plan sponsors must balance the need to grow assets with the responsibility to help participants generate reliable retirement income. By offering a range of decumulation solutions such as annuities, guaranteed products, and diversified investment options and by leveraging plan scale, sponsors can deliver better outcomes for retirees. Thoughtful plan design and ongoing support ensure that participants are well-equipped to make informed decisions and achieve greater financial security throughout retirement.

Bridgebay Financial, Inc. provides comprehensive due diligence to protect plan fiduciaries, enhance transparency, and improve participant communication. The firm leverages technology to offer cost-effective investment solutions and adheres to the highest professional standards set by the CFA Institute and IMCA.

Bridgebay’s advisory services focus on:

• Retirement Plan Services

• Institutional Investment Consulting

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Specialty services include RFP search and evaluations for pension consultants, OCIOs, multi-asset class managers, co-fiduciary managers, investment managers, diversity-owned managers, ESG managers, custodians, and recordkeepers.

Bridgebay does not manage or custody client assets, nor participate in wrap-fee programs. Clients include corporations, defined contribution plans, foundations, and not-for-profit organizations.