Willis Towers Watson has some new insight on how to help defined contribution plan participants thrive in 2020.
The authors of a new paper at WTW note the trend of soaring DC plan assets in recent years (rising about 90% between 2007 and mid-2019) is driving more innovation, more focus on compliance and competitive fee structures.
To help address the challenges ahead in 2020, the paper has action step recommendations for DC plan sponsors in three broad areas—financial wellbeing, investments and plan compliance.
While the full paper is available here, what follows is a summary of the recommendations in each of the three areas.
Financial wellbeing
• Measure workforce financial stress. Before rolling out a financial wellness program, WTW says employers should first measure the financial stress of their workforce, something many leading employers have already taken several steps toward completing.
Focus groups and pulse surveys help employers understand employee preferences. And detailed workforce analytics can provide a view into which employee segments are financially struggling and why. By identifying employee preferences and needs, sponsors can remove the guesswork and adopt financial wellbeing solutions that can create value and be broadly used by its workforce.
• Consider decision-support tools and financial coaching. Today’s leading-edge solutions focus on decision support and build on recent learnings from behavioral economics and employee attitude research. WTW research finds most employees prefer dynamic spending and savings tools over static budgeting tools. Employees want to be nudged, not judged. And they want decision support tools that provide personalized and actionable suggestions.
Research shows that employees also want unbiased financial coaching, and overwhelmingly prefer personal advisor support to educational seminars.
When evaluating financial coaching firms, plan sponsors should consider those that have no conflict of interest, employ holistic solutions, leverage technology, and provide access to experienced and certified professionals.
• Explore innovative design solutions. A range of innovative design ideas have begun to emerge in response to the problem of workforce financial stress, focusing on helping employees balance the competing needs of long-term retirement savings and near-term financial obligations.
For example, “sidecar” or “rainy day” after-tax accounts with employee automatic deposits can help employees weather a near-term financial emergency. Student loan management programs create rewards for paying down debt in the short term. Some integrate with matching 401k contributions to help support long-term retirement savings. And many employers are using workforce analytics to modify their auto-contribution and auto-escalation features to ensure employees are saving at a level to stay on track for retirement.
Investment trends
• Make plan investments work harder. The paper’s authors say superior investment selection will be essential for plan participants to help meet their retirement goals.
Sponsors, consultants and investment managers should judiciously add asset classes like direct real estate, public equity and hedge funds to unlock potentially superior investment returns and further diversify the current generation of target-date funds while enhancing potential outcomes for participants.
• Design a sustainable plan to fit future growth. Sophisticated, state-of-the-art investment options such as white label funds and custom TDFs are found today in about 65% of large plans. While white label funds were initially available only to the largest plans, technology now allows providers to make them accessible to smaller plans as well.
Among administrators and asset managers, new product designs such as hybrid qualified default investment alternatives are emerging to better meet the different needs of younger and older workers. Participants will be the long-run winners in these battles, but only if sponsors monitor the progress and react to the new opportunities.
• Assess the innovations occurring in DC plans to ensure they are the most sustainable for employees in all stages of life. The paper says the evolution of DC plans will include broader offerings of retirement income solutions, whether as in-plan investment options, core menu offerings or guaranteed products available outside the plan.
Sponsors show an increasing interest in encouraging participants to remain in their plans after they retire, with benefits for both parties. To keep retired workers onboard, suitable investments will be needed.
The SECURE Act is expected to provide safe harbor cover for sponsors to offer in-plan annuity products. But regulation aside, a complete retirement offering likely will be more complex than investments applied to participants’ savings efforts, as the goals and needs of retired employees rapidly diverge.
“We encourage plan sponsors to look at the available retirement income solutions that can help participants balance income needs with growth potential,” the paper says.
• Delegate investment choices to an OCIO. To ensure consistently high fiduciary standards, the authors believe sponsors should consider delegating responsibility for constructing and monitoring more sophisticated solutions to either internal staff with appropriate expertise or an outsourced chief investment officer (OCIO).
Utilizing the outside expertise of an OCIO allows for potentially better returns, enhanced risk management and potentially lower costs, and also frees up plan sponsor resources for advancing participant outcomes and the strategic vision of the plan.
Plan compliance
• Conduct fee and service benchmarking. Lawsuits claiming excessive DC plan fees, overlapping and underperforming investments, and failure to monitor revenue sharing have become a fixed part of the DC plan landscape.
“To help address this risk, we believe plan sponsors should conduct regular fee and service benchmarking reviews,” the paper says, which would demonstrate that fee levels are reasonable and that sponsors are meeting their fiduciary responsibilities.
• Adopt controls to minimize cyber risk. Sponsors should conduct an independent cyber risk assessment focusing on the vendor’s critical systems, remediation protocols, workforce training and overall financial commitment to cybersecurity, the paper recommends.
• Prepare for the SECURE Act. The authors note enactment of the still stalled-in-the-Senate SECURE Act could help sponsors significantly improve the effectiveness of their DC programs through a variety of its provisions, and advise plan sponsors evaluate its potential impact and opportunities.