Defined Contribution Plan Trends that Plan Sponsors Need to Know

Defined contribution (DC) plans were designed to help participants become retirement ready. However, nearly 40 years since their introduction, as people who began their careers in that period are hoping to leave the workforce, retirement readiness still tops the lists of concerns for DC plan sponsors and participants. Many employers sought for years to maximize employee participation, educate employees about diverse investment options and use their 401(k) or 403(b) plans to attract and retain staff. However, evidence shows that two thirds of employees with access to plans are not using them to save.

The greater focus on fiduciary responsibility in recent years and the fact that so many older American workers have insufficient funds set aside for retirement are driving several trends and changes in DC plans. Research from Deloitte and Callan observed defined contribution plan trends and priorities for 2018 as plan sponsors strive to create better long-term outcomes for participants. Plan sponsors heavily cited the already mentioned retirement readiness as a main concern in addition to continued effort to address fees and improve participant communication (including available investment advice).

Here are some industry trends that are reshaping how employers approach their DC plans now:

Stepping Up Fiduciary Role

There has been much analysis and concern about the Department of Labor (DOL) Fiduciary Rule and plan sponsors’ fiduciary role in recent years. While the DOL rule expanded the investment advice fiduciary definition under Employee Retirement Income Security Act (ERISA), a court decision on March 15 and delays from the current administration have created uncertainty about its future.

Regardless of what is decided, the focus on the fiduciary role and tighter interpretation of a plan sponsor’s responsibilities has pushed sponsors into detailed reviews of many aspects of their plans with recordkeepers and advisors. The goals are to ensure sound plan management and acting in the best interests of participants.

Review Plan Fees

As a fiduciary, reviewing plan fees has grown increasingly important. Forty-one percent of sponsors surveyed by Callan reduced overall fees as a result of reviews. For many plans, this has included new fee arrangements with recordkeepers, which Callan found that 53% of sponsors know there is a direct fee charged by the recordkeeper. An additional change to make investing less daunting for employees is a 13 percent drop in the number of funds offered by DC plans since 2015. With the emphasis on lower fees, the trend is to offer more passive, lower cost investments.

Maintain an IPS

The fiduciary rule also put pressure to offer fund choices with low fees which forced sponsors to adopt more structured review of fees and investment choices. According to Callan’s DC trends survey, 94% of sponsors maintain a formal investment policy statement (IPS). Plan sponsors who did not have an IPS in place are developing one. Best practice dictates an annual review of the IPS.

Offering Automatic Features

Within the non-government space, 7 in 10 plans offer automatic enrollment. Most DC plan sponsors use automatic enrollment for new hires, and 20% of those plans that have not implemented auto-enroll intend to in 2018. Additionally, about a quarter of these firms are automatically re-enrolling existing employees.

Enhancing Education and Advice

The DOL fiduciary rule allowed plan providers to provide general education information to participants without rising to the level of fiduciary advice. As a result, more sponsors are refining their retirement benefits communication strategy. To maximize value, many are tailoring content based on employees’ specific circumstances and demographics. Deloitte reported that 65 percent of sponsors are now targeting messages based on demographics, such as reaching age milestones. They also found that 74% of these targeted communications are to encourage participants to increase savings followed by investment and financial market education.

More employers are providing participants with access to independent investment advisory services, too. However, data shows that employees are not using the option. A Cigna study reported that 89 percent of employees want access to personal financial planning advice from their plan. The Callan 2017 study reported that 75 percent of plan sponsors offer some form of investment guidance or advisory service. That may include seminars, videos or access to advisors. While the latter seems more likely to appeal, TIAA found that only 13 percent of participants in plans for which they were the sole recordkeeper accessed the advice and interest increased with age.

Utilizing Robo-Advisors

As plan sponsors look to cut fees, many are turning to robo-advisors for account management, compliance, investment selection and plan administration services. More plans are offering online advice (65 percent in 2017 versus 58 percent in 2015). The algorithms that these advice tools use typically recommend passive, lower cost options, target-date and other balanced options.

While some studies report that interest in investment guidance increases with age, many of the newer robo-advisor tools are expected to appeal to millennials who are not only tech savvy but would also be more likely to expect an app to suffice versus a direct advisor-to-participant communication. For plan sponsors, offering an independent advisor option helps to address concerns as a fiduciary about helping employees improve their retirement readiness without assuming the risk.

Taking a Look at Your Plan

DC plans are a great benefit to employees who utilize them. However, they need to be well-thought-out in design, cost-effective and understandable to participants. Given the concerns about poor savings rates and some plan sponsors not acting in participants’ best interests, retirement savings plans are receiving greater scrutiny these days. Auto-enrollment and other changes have helped to improve participation. However, plan sponsors should take a good look at trends reshaping the benefits being offered by others and how they can improve their plan.

As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or record-keeper. We offer clients unbiased assistance to control their retirement plan risks and deliver benefits effectively. Plan sponsors also rely on us to review fund lineups and provide scorecards of investments, highlighting any changes recommended. Feel free to contact us at (312) 973-4911 if you would like to learn how PlanPILOT can help with your retirement plan and plan participants.

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