As the Defined Contribution plan industry continues to evolve, it’s helpful to step back occasionally and review the big picture. A recent survey from Callan Institute, 2018 Defined Contribution Trends and an article from Willis Towers Watson, Redefining DC Plans for the Future: Top 10 Updates to Our Vocabulary for 2018, are informative reviews of industry changes. Here are some highlights from both reports.
Monitoring the Trends
The Callan Institute’s 2018 Defined Contribution Trends survey included responses from 152 plan sponsors, both Callan clients and other organizations. About 60 percent of the respondents reported having $1 billion-plus in assets. Among the key findings:
Fees matter. Several of the survey’s themes considered fees. The results show that sponsors remain focused on plan fees and interested in lowering them.
Survey question: Rank the actions that your plan has taken within the past 12 months to improve its fiduciary positioning.
Result: Reviewing plan fees was cited as the most important step plan sponsors had taken during the past 12 months to improve their plans’ fiduciary positions. Updating or reviewing a plan’s investment policy statement was ranked second. These results are a repeat of those from 2016.
Survey: When was the last time you calculated all-in fees for your DC plan? (All-in fees defined to include all applicable administration, recordkeeping, trust/custody and investment management fees.)
Result: About 83 percent of sponsors calculated their DC plan fees within the past 12 months, an increase from 78.8 percent in 2016. In 63 percent of responses, consultants or advisors performed the calculation for the sponsor.
Survey: What was the outcome of your fee calculation and/or benchmarking?
Result: Fee reviews are more likely to lead to cost reductions for the plan. Forty-five percent of plans kept fees the same following their most recent fee review; 40.5 percent reduced fees, an increase from the 31.6 response in 2016.
Survey: What steps around fees are you most likely to engage in next year (2018)?
Result: Roughly 60 percent sponsors are either somewhat or very likely to conduct a fee study in 2018, a projection that’s consistent with the prior year. Other somewhat or very likely actions include switching to lower-fee share classes (51.7 percent) and renegotiating recordkeeper fees (50.5 percent).
Other Points
Some other findings worth highlighting:
- About 71 percent of plans now offer a Roth feature, an increase from roughly 68 percent in 2016. The trend has shown steady growth in Roth options over the past 5 years, with the adoption rate for 2013 at 49 percent.
- Financial wellness continues to demand plan sponsors’ attention. According to the survey, it will be the primary focus of communication in 2018, up from fifth place for 2017.
Changing the Conversation
Words matter. If your plan sponsor-client is using outdated terms, the risk of miscommunications increases. Willis Towers Watson, a global advisory, brokering and solutions company, recently shared an update to its DC vocabulary for 2018 in its article, Redefining DC Plans for the Future. The redefinitions include, among others:
Term: Plan design
Traditional (definition): Plans are viewed as a supplemental retirement benefit. Matching contributions were the primary tool used to encourage modest employee savings rates and maintain competitiveness in the market.
Modern: Nowadays, DC plans are participants’ primary or even sole retirement benefit. Consequently, customized design focused on retirement adequacy, particularly for participants that are approaching retirement, is essential. Plan designs also should ensure that the plan’s structure is cost-sustainable, aligned to the sponsor’s business strategy and supportive of the employer’s workforce and financial priorities.
Term: Plan success
Traditional: Did investment managers on the platform outperform their benchmarks? For participants, relevant metrics included participation and savings rates, account balances, etc.
Modern: The focus is shifting to producing successful participant retirement outcomes. In other words, will participants be ready to retire at normal retirement age with sufficient wealth and/or income to maintain their desired lifestyles? This approach requires including different readiness metrics that identify workforce gaps in financial well-being and retirement preparedness.
Term: Qualified default investment alternative (QDIA) and target-date fund (TDF) selection
Traditional: Willis Towers Watson defines the use of single QDIAs, typically TDFs, as static solutions. These off-the-shelf TDFs are typically selected based on performance and expenses or by defaulting to a proprietary fund series managed by the recordkeeper.
Modern: In contrast, the dynamic option works with multiple QDIAs that evolve to meet participant needs in each phase. Actions can include converting from TDFs to managed accounts to retirement income solutions as participants approach and then move into retirement.
Terms: Diversification and investment solutions
Traditional: Extensive plan selection of off-the-shelf single fund options—mutual funds and collective trusts—across the investment style-box spectrum with additional specialty funds as options.
Modern: Streamlined investment menu using off-the-shelf or custom multimanager options focused on participant retirement objectives.