By Mark Olsen, Managing Director at PlanPILOT
Planning for the year ahead is critical to ensure we are prepared to meet our clients’ needs and deliver valuable insights in a timely manner. In this article, we outline the themes and activities we expect to be key priorities in our work with clients throughout 2023, as well as inform our thought leadership in the year ahead.
Beyond “If and When”, Onto “What to Do”
We first want to share that we are picking up on a shift in the way plan sponsors are operating in oversight of defined contribution (DC) plans. In fact, through our work, we’ve observed plan sponsors want to know what to do, the best way to tackle problems and seek solutions, and to understand the practical implications of their activities in plan oversight. We anticipate this shift to underpin all of our work with clients in the year ahead.
Top Priority Themes
- Changing Landscape and Assessing Suitability of Advisor Partnerships. The retirement provider landscape — in whole — is layered with complexity and the potential for conflicts of interest. Increasing merger and acquisition activity among providers to support the growing need to identify sustainable revenue streams and the push for product placement, and it adds up to a complex arena for plan sponsors to navigate when selecting a partner in retirement plan oversight. Plan sponsors face the need to assess matters of independence and to ensure their advisor is philosophically aligned to their organization’s values, objectives, and needs. The changing landscape and concern over conflicts of interest brings into focus the importance for committees to conduct thorough due diligence and assess the suitability of their provider partnerships. It is our belief that it is vital to ensure that the priorities of both the client and the advisor are in alignment. This topic will be a central tenet in our work with clients for the year ahead.
- Collective Investment Trusts in 403(b) Plans – Institutional employer-sponsored DC retirement plans, including 401(k) plans and governmental 401(a) and 457(b) plans, have enjoyed the benefits of collective investment trusts (CITs) for the better part of fifteen years. Over the last several years, legislators have worked to pave the way to allow CIT use in 403(b) plans, which is currently not permitted. In late December 2022, SECURE 2.0 passed (1), opening up the potential use of CITs in 403(b) plans. There was a loophole in the final regulations which requires a revision to federal securities law in order for CITs, as well as pooled Stable Value funds to be permitted in 403(b) plans. There are pros and cons to CITs, but in aggregate, the greatest benefit is cost efficiency. We expect the topic to be front and center in 2023 as we prepare our clients for using these vehicles in 403(b) plans.
- Environmental, Social and Governance (ESG) Finalized – All eyes have been on ESG over the last several years. Actual implementation and use of ESG options in DC plans have remained fairly lackluster to date. However, the overall interest in ESG is not dying down. In fact, the complexity of the topic is increasing – with much debate about the value proposition of ESG and the question of how, and even if, plan sponsors should incorporate ESG in DC plans. The Department of Labor’s Final Rule on ESG – Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (2) clarifies that the changes to the regulation enable fiduciaries to factor in the impact of a broader range of ESG factors on investments. The DOL clarified that the amended regulation continues to require fiduciaries focus on relevant risk-return factors. It also makes clear that fiduciaries cannot take on excessive risk or sacrifice returns in the ESG pursuit. We anticipate the debate and evaluation process to continue as plan fiduciaries consider ESG investing.
- Custom Qualified Default Investment Alternatives (QDIA) – Last year, we wrote about the broad range of QDIA offerings and the evolution in the choice of solutions. In 2023, we anticipate the demand for customization of the default alternative in defined contribution plans to gain momentum. The appeal of a custom solution is that it allows for tailoring of the glide path and underlying investments to your plan objectives and investment beliefs. Often, custom solutions are more appealing to larger plans as scale and buying power make the endeavor more cost effective. As DC plans continue to grow and evolve, we expect this trend to be a focus area in 2023 in our work with clients, particularly given the ability to tailor the design of the default to the unique needs of individual plans. The assessment process for selection, implementation, and monitoring is vital to get right, and it is now more important than ever given the role of the default offering in achieving successful retirement outcomes.
- Retirement Income Solutions – In our paper series last year, we covered the broad array of solutions and provided suggestions for plan sponsors in the retirement income pursuit. We expect 2023 to bring more deliberate retirement income solution assessments and pursuits. Specifically, plan sponsors are moving toward assessments that review retirement income offerings based on the unique characteristics of the offering and alignment to plan needs. In other words, retirement income pursuits are aimed at integrating a solution or a range of solutions for purpose.
- Raising Risk Literacy in Plan Oversight – We covered how risk comes in many forms in our paper series last year. The last year has accentuated this point – bringing into focus the reality of experiencing these various risks inside of retirement plans. Inflation has remained high, interest rates have been on a steady increasing trajectory, volatility and downside risk have crept into the market environment, and participants understandably are reacting, with 401(k) withdrawals on the rise and hardship withdrawals at an all-time high in 2022. (3) The reality of the range and impact of the various risks faced in retirement plan oversight, and ultimately affecting participants, will be central to plan sponsor work in 2023.
- Importance of Staying Vigilant with Litigation on the Rise – The number of class action 401(k) and 403(b) lawsuits in 2022 was significant, due in part to the U.S. Supreme Court decision vacating a Seventh Circuit decision (4) in early 2022. The decision makes it easier for plaintiff lawsuits to survive motions to dismiss. As a result, we can expect this steady trend of lawsuits connected to plan monitoring and excessive fees to remain in focus… requiring plan sponsors to stay vigilant in their plan work.
Stay Tuned!
These themes… and more will shape our work and inform our client partnerships in 2023. You can expect us to produce thought leadership to illuminate the importance of each of these priorities, as well as provide actionable insights for you and your committee to leverage in your day-to-day plan oversight. Rest assured that we are prepared to help our clients tackle these topics effectively. We also welcome and value your input. If there are topics you would like us to add to our thought leadership list, please get in touch with us.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.
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(1) Securing a Strong Retirement Act of 2022, H.R. 2954 https://www.congress.gov/bill/117th-congress/house-bill/2954/text
(2) https://www.federalregister.gov/documents/2022/12/01/2022-25783/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights
(3) Source: Vanguard https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/vanguard-investor-pulse.html
(4) https://www.supremecourt.gov/opinions/21pdf/19-1401_m6io.pdf