Managing retirement with global DC optimization 

Given defined contribution (DC) plans now provide most retirement benefits for employees globally, good oversight and management of these arrangements are in the spotlight. But what does “good” look like?

The presence of defined contribution (DC) plans, funded by employees and their employers, has grown in the past decade. We’re now living in a DC world, with assets in DC plans exceeding defined benefit (DB) plan assets.

According to Mercer Marsh Benefits’ 2024 People Risk report, the top concern for HR and risk professionals globally is rising health and benefit costs. Given that DC plans make up the biggest proportion of many employers’ benefit spend, it’s a critical topic for HR and Risk professionals alike. Another threat (#5 of 10) facing employers is the changing legislation and scrutiny organizations are under, which is increasingly a focus in the DC space. 

Managing defined contribution plans in multiple countries creates unique challenges for multinationals. While the move from DB to DC plans is typically seen as a de-risking move and often also a cost-reduction opportunity, the reality is that the risks have simply shifted from investment, inflation, longevity and interest rate risks to governance and administration risks. 

So, how can businesses manage these risks and optimize their DC plan management at a global scale?

Common DC challenges facing multinational businesses

Governance risk for retirement plans is broad, but there are five common challenges associated with global DC plan management. Employers need to be mindful of:

Ensure that fiduciary duties are fulfilled according to local legislation and best practices in each country to ensure you act in members’ best interests. Otherwise, you risk penalties or class-action lawsuits. To mitigate this risk, multinational businesses need to be confident that plans are actively managed at a local level.

Legislative changes can often catch businesses off-guard. DC plans and the regulations surrounding them require regular monitoring as the retirement world evolves. At the same time, HR teams in smaller markets have often been replaced by offshore shared service centers which are not close to local market developments. Finding a way to keep track of changes in legislation, best practices, trends and developments is essential.

Employees face increasingly complex decisions surrounding their finances, and increasingly expect guidance from their employers. Our recent Global Talent Trends study shows that employees who feel they are thriving at work are twice as likely to have access to financial wellness advice from their employer, compared to non-thriving employees. Gaps in this support could lead to reputational risk.

To support employees, a user-friendly platform to access their pension is essential, ideally offering the opportunity to easily model different scenarios. Simultaneously, help them to understand the value by offering retirement and financial education. 

While employees own the investment risk in a DC plan, the employer has a responsibility to ensure that the default option in particular (which the vast majority of employees stick with in practice) is tailored to meet the needs of plan members, and offers good value for money.

Keep a close eye on fund performance and ensure returns are not left on the table. Address funds that are underperforming due to poor fund management or market limitations, and ensure a diverse list of options is offered to reduce risk.

Another way to manage risk is via target date funds, which invest in riskier assets when an employee is younger for potentially higher reward, and then favors safer investments as the employee nears retirement. 

Plans that have stayed with the same employer for many years without being remarketed are more likely to have unnecessarily high fund fees or other “hidden” administrative fees that directly impact a member’s account balance. This generally happens due to a lack of monitoring by employers. We recommend reviewing plan fees every three to five years.
Optimizing global DC plans ultimately relies on lowering the risk across each of the above five components while seeking to maximizing the value for your employees.

How can companies improve the effectiveness of their DC plans?

According to Mercer’s Global Pension Index 2023, companies can improve the adequacy, sustainability and integrity of their retirement income systems by:

  • Increasing coverage through autoenrollment or increasing contributions.
  • Making it easier to work longer by improving the flexibility of retirement in light of labor shortages. DC plans can encourage people to work longer, help provide a glide-path into retirement and help businesses retain essential skill sets. This can also help lengthen the time employees contribute, as well as deferring the point at which the employee needs to access retirement savings, which can improve overall retirement outcomes.
  • Increasing pension contributions (although, for some employers already concerned about rising costs, increased contribution requirements globally are adding to the strain).
  • Reducing “leakage” - while early access to DC balances is a new opportunity that adds flexibility for employees who need access to funds in difficult times pre-retirement, it increases the future financial risk for plan participants.
  • Transparency and disclosure so individuals can educate themselves about their retirement options.

How have multinationals successfully managed global DC plans?

Of course, every business is different, but, from our work with a number of multinational companies, we’ve seen a few common themes in successful global DC plan management. Here are a few of them:
  1. Centralized governance
    Businesses that have been successful in this area take the stance that any employee, wherever they are, should be entitled to a good quality retirement plan. For some companies, this means following best practice from a country such as the US and applying this to other countries, even where this may not be typical local market practice. This mindset is about being risk-averse and taking care to seek to optimize employees’ retirement outcomes.
  2. Keeping stakeholders close
    Dedicated committees, whether focused on investment performance, the administrative aspect of DC plan management, or the broader benefits offering, oversee retirement plans globally, and work directly with local offices to share best practices, advice and guidance.
  3. Dedicated support and guidance for local plan sponsors
    Managing fiduciary risk with dedicated pension support for local offices encompassing the latest regulatory changes and market trends. This is particularly helpful if local offices are not retirement plan experts but are responsible for benefits across the board.
  4. Consistent pension plan audits
    Ensure plans are running optimally with regular pension “health checks” across countries that focus on fiduciary risk, fees and investment performance. Also keep track of the online tools available to members, take-up rates and any complaints that need to be addressed.
  5. Championing financial well-being
    Bring vendors on site to host educational sessions, with a particular focus on younger workers who generally have less knowledge of retirement planning.
Much of the content in this article has been informed by a recent Mercer webinar, “Managing retirement: Global defined contribution optimization”. If you want to learn more, sign up for the webinar replay.
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