Over the past few decades, defined contribution (DC) plans have evolved from a supplemental retirement and savings vehicle to the primary one for many companies in the US.
The DC industry has evolved in parallel with this change by creating innovations such as auto-enrollment and target-date funds (TDFs). Accordingly, litigation in this sphere has also been significantly modified. The past year of 2020 has brought extraordinary challenges and opportunities into the DC space, including new investment opportunities, unprecedented legislation and ever-changing risks.
In order to adapt to the growing fiduciary risks, the next stage in the evolution of DC plans is nearly here. You can learn more about the ways of identifying fiduciary risks with the right tools in this case study. Understanding risk management in this climate is crucial for plan sponsors who need to figure out managing risk today, planning for tomorrow, while at the same time carving out their role in a world where DC plans are now the dominant retirement and savings instruments. According to one survey, of the 464 U.S. plan sponsors asked, 78% said that their DC plan was the sole retirement offering to new employees.
Over the past few years the value of DC plans both to participants and employers has considerably grown. Employers consider that DC plans are important for maintaining a competitive organization within the company, and some of them view their DC plans as an important tool for attracting highly qualified employees. Plan sponsors also take into consideration ongoing financial concerns of employees and understand the support that an expanded DC plan offering can bring over the course of their working life, as well as in retirement.
DC plan sponsors are in a position to provide valuable tools and resources for their employees. This is possible because defined contribution plans actively support participants by helping them to achieve financial confidence and build a solid retirement plan.
Main Aspects of DC Plans: Plan Design, Investments, Plan Administration and Risk Management, Retirement Readiness/ Financial Wellbeing
Plan design is a vital component in helping sponsors plan for tomorrow, today. The DC space has seen a number of innovations that sponsors offer their participants, in order to increase the flexibility of their savings.
In the last decade the DC industry has changed a great deal, so have plan sponsors. From a plan design perspective, this evolution has included auto-enrollment and auto-escalation. Thus, many sponsors set their default enrollment employee deferral rates at levels to receive the full employer match. Moreover, nearly all sponsors that implement automatic contribution escalations, set their deferrals at or above the level that draws the full match.
Innovations in the DC space are not limited to plan design, as plan sponsors find ways to address the challenge of distributing income in retirement. In recent years more and more plan sponsors offer lifetime income options in the DC plan, there is an increased focus on retirement spending, not just retirement savings.
Another feature employers want to introduce is custom investment options. Custom-designed white label or private label funds can provide participants with opportunities to diversify from public equity and fixed income markets to lower their costs. However, most plan sponsors have not built these initiatives into their plans yet.
While focusing on ways to enhance plan design to better serve employees’ needs, plan fiduciaries cannot lose sight of managing the risk inherent in their plans today. Thus, the efficient management of administrative and investment fees becomes a major priority. To combat these risks plan sponsors have benchmarked their recordkeeping fees over the past few years. The cybersecurity of participants’ accounts is another issue of concern. Employers acknowledge the reality that nefarious actors are increasingly targeting DC plan participant accounts, which if not properly protected can be susceptible to hacking, especially given the recent shift to remote working, people are increasingly more vulnerable when working from home.
The current economic turmoil means employees’ financial wellbeing is a major concern for many sponsors. The recent financial uncertainty among workers has presented a lot of challenges. As for retirement readiness, there are major issues for management, some older workers cannot even afford to retire. However, employers that continue to offer DB plans tend not to face as many concerns over retirement readiness and financial stresses on their workers. In addressing these problems, most employers think that companies should provide guidance to employees such as educational support for both short-term stress and retirement readiness. Examples include seminars and access to financial advisors on both retirement savings and current financial wellbeing.
Plan sponsors have done a lot to broaden features and build greater flexibility into their plans. The on-going evolution in DC plans is meant to encourage employees to rely and have confidence in them, by navigating their financial stress but also enable them to continue saving for retirement.