Retirement plan providers are increasingly introducing defined benefit features in their defined contribution offerings, vendors and analysts say.
Defined benefit tools such as automatic enrollment and automatic asset allocation are seen as crucial to helping companies boost plan participation.
Mellon Financial Corp. in Pittsburgh offers 401(k) plans with features, for some clients, like customized asset management strategies, said Ronald P. O'Hanley, a Mellon vice chairman and the president of its institutional asset management unit.
"We take DB products and literally replicate them in a low-cost way to install them in a DC plan," Mr. O'Hanley said. "It's the professionalism of a DB portfolio but delivered in a cost-effective way for DC participants."
As companies and municipalities increasingly reduce pension benefits or terminate their defined benefit plans, he said, retirement plan providers need to help employers manage the transition to defined contribution plans. "We need a combination of more robust defined contribution plans and more robust incentives to help people save for retirement," he said.
Fidelity Investments also offers defined contribution plans with some of the automated features that are more common in traditional pension plans, according to Dave Liebrock, an executive vice president of the mutual fund giant.
"What I'm seeing more of is plan sponsors and advisers offering life-cycle funds," Mr. Liebrock said. "It makes it much easier for the employee to make a decision about where to put their money."
Fidelity also offers automatic enrollment for defined contribution plans, he said. If employers select this feature, all the company's eligible employees are enrolled in the plan on the date of eligibility, and Fidelity decides how the employees' deferrals will be invested based on the projected time until retirement. Employees can opt out of automatic enrollment.
More employers have been introducing defined benefit features to their defined contribution plans in recent years in an effort to drive up participation and to forestall a need by some employees to work past the typical retirement date, Mr. Liebrock said. Participation in 401(k) plans stands at about 66%, according to a Fidelity survey of 10,800 corporate plans that was released last year.
"Employers are acutely aware that if people aren't participating [in the defined contribution plan] when they're first eligible, they potentially might not have enough money to retire," he said. "If employees continue to work, costs to the company will increase because of older workers' higher salaries and higher health-care costs."
A study released late last month by Prudential Financial Inc. recommended that companies add defined benefit features to their defined contribution plans in order to boost participation.
Offering annuities as options in defined contribution plans can help employees provide for a steady stream of income in retirement, said Scott Sleyster, an executive vice president in the retirement unit at Prudential Financial and a co-author of the study.
"One of the disappointments in the structure of the defined contribution market is, we've been so focused on building up a balance that employees don't think about what they need in retirement," Mr. Sleyster said. Living benefit riders, which guarantee lifetime withdrawals on variable annuities while allowing investors to hang on to their portfolio assets, may be the next wave in 401(k) investment options, he said.
Automatic enrollment can make a dramatic difference in plan participation, he added. "It particularly benefits lower-paid workers and younger employees," he said.
