Hybrid plans could become almost as popular as DC plans in the United States by the end of the decade, according to a report.
The Wealth Allocation Council report, called The New Wave of Pension Plans in America, estimates that only 5% of total U.S. retirement assets are currently in hybrid plans and may reach 17% in the next seven years.
“Hybrid plans could triple their share of the total retirement market by 2020 if they do, in fact, prove more attractive to both sponsors and participants,” states the report. “Initial growth may be at the expense of traditional DB plans, but over time it may be the growth in DC plan assets that will slow and then reverse.”
In the company’s view, most hybrid plans are clearly better than DC in terms of the goal of providing adequate retirement benefits.
“DC plans put the burden of managing retirement investment on the individual,” the report says. “Some people are skilled enough to handle this. The vast majority are not.”
Some DB sponsors have been exploring ways to keep their plans open but shift at least some of the risk to employees.
“Within North America, it’s Canadian plans that have taken the lead in implementing this concept under the broad banner of shared-risk pension plans.”
However, because shifting some risk effectively means reducing some benefits, these DB variants have often proved difficult to implement in existing plans.
Sponsors will still likely close the traditional DB plan and then offer a new plan. The Wealth Allocation Council believes these new plans will not be DC but based on hybrid benefit structures.
“Under one guise or another, we believe that new hybrid benefit plans will play a major role in the future of the pension industry in the United States,” the report concludes. “Hybrid plans offer the features that participants need, at a cost that sponsors can bear.”
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