Managing around the pandemic-induced disruptions is time-consuming, but it’s helpful to step back occasionally and start thinking about the eventual post-COVID-19 period. I believe the three reports discussed below identify findings and trends that will influence retirement plan consulting in the years ahead and are worth monitoring.
The Evolving Defined Contribution Landscape: Part 2
When I ask defined benefit (DB) plan consultants or investment managers about alternatives, they frequently respond that almost all the asset classes once considered alternatives have been so widely adopted that they’re now mainstream. Similarly, ESG (environment, social and governance) criteria have seen increased adoption.
But according to research from PGIM, the global asset management business of Prudential Financial Inc., alternatives and ESG approaches remain unavailable for most defined contribution (DC) plan participants. PGIM’s survey of 138 DC plan sponsors in mid-2020 found that only 13% of the plans offered alternative investments as part of their target-date funds. Only 24% had “taken action to incorporate environmental, social, governance (ESG) approaches into their plan over the last three years.”
Among the alternatives categories, real estate private equity and private debt had gained the most acceptance among plans at 9% and 5%, respectively. Hedge funds, private equity and liquid alternatives all were at the 4% level. Per the report: “The most common reason for not including alternatives as an investment option is the need for enhanced participant education (67%). This is followed by operational challenges (34%), the perceived litigation risk (33%) and cost (27%).” One additional stat worth noting: 28% of respondents said they don’t believe in alternatives from an investment perspective.
There was a higher level of interest and use of ESG investing: “Almost one quarter (24%) of plan sponsors indicate they have taken action to incorporate ESG approaches into the plan over the past three years, while half (52%) said they have not. An additional 23% were neutral on the matter. Directionally, there is greater interest in incorporating ESG approaches among mid-sized plans with $500 million -$999 million in AUM.”
“Albeit early days, we believe the demand for sustainable investment solutions as well as alternative investments is likely to increase among sponsors,” says Josh Cohen, head of institutional defined contribution with PGIM. “We see this happening already with high-net-worth individuals adding these solutions into their portfolio and there will likely be interest in how to access these in DC plans. Advisors should consider supporting their plan sponsor clients by incorporating a more institutional mindset into their retirement plans.”
Willis Towers Watson
Willis Towers Watson conducted its 2020 U.S. Defined Contribution Plan Sponsor Survey in September and received responses from 464 U.S. employers that sponsor at least one DC plan. Fifty-two percent of respondents had at least $1 billion in plan assets. Among the key findings:
- DC fee litigation: The majority (80%) of plan fiduciaries report that managing fees is a major priority. This represents a double-digit (14-percentage-point) increase over the past three years as lawsuit activity targeting DC fees has continued unabated.
- Risk management: Over a third of respondents (37%) indicate managing the cybersecurity of participants’ accounts is their top risk management and fiduciary concern. About one in four (24%) is very concerned over the selection and monitoring of investments and keeping plan fiduciaries current on regulatory and market trends.
- Target-date funds: There is a growing focus on target-date fund (TDF) “fit,” with the survey finding a 53% increase in the number of committees reviewing TDF suitability with participant needs.
- Delegated investment consulting: The percentage of plan fiduciaries that use delegated investment consulting services has more than doubled over the past three years from 6% in 2017 to 15%.
- Reinstating employer contributions: The majority of employers that suspended or reduced employer contributions in 2020 expect to reinstate them by 2021, with 60% reinstating the contributions at the same level as prior to their suspension/reduction.
- Inclusion and diversity: Close to two-thirds of employers have reviewed or plan to review various aspects of their DC plan as part of their inclusion and diversity strategy.
- Fees: Three in four respondents (75%) have benchmarked their record-keeping fees over the past three years, with many seeing meaningful results. About two-thirds (64%) reported their benchmarking resulted in lower administrative fees, while a third (32%) were able to reduce investment expenses.
Alight Solutions’ annual Hot Topics survey investigates employers’ plans for their retirement and financial well-being plans. The 17th edition of the survey, which was conducted in the fall of 2020 with 116 organizations, covered several new themes, including:
- The impact of the COVID-19 pandemic on retirement and financial well-being plans
- Employer attitudes toward provisions of the SECURE Act
- The popularity of electronic disclosures and private equity in defined contribution plans
Here is a summary of the major findings:
Most employers are not adjusting their contributions as a result of COVID-19:
- 91% of employers say that they made no changes to their match formula in 2020.
- Of those who made changes, all say they suspended their contribution instead of permanently reducing the amount.
- 99% of employers say that they don’t plan on making any changes to their match in 2021.
Employers are expanding their focus on financial well-being:
- 9 out of 10 employers say they are very or moderately likely to create or expand their financial well-being programs beyond retirement decisions.
- 56% say that they have a financial well-being strategy that is either fully executed or in the process of being implemented—up from 35% in 2019.
- 83% say that they have financial well-being as part of a broader well-being initiative—up from 67% in 2019.
Employers are eager for innovation:
- 55% say they are very or moderately interested in a clearinghouse service that automatically rolls balances between plans when people change jobs.
- Half of employers believe target date funds should be revised to allow for more inputs than just age—up from 35% in 2018.
Employers are welcoming some retirement plan changes as a result of the pandemic but not many:
- 1% say they are very interested in becoming part of a broad pooled provider plan, which would allow them to join forces with other employers.
- 3% say they are very interested in adding annuities to their plans, even though the SECURE Act provided some protections.
- 15% say they are very interested in allowing workers to withdraw up to $5,000 from the DC plan for the birth or adoption of a child.