Legislation, regulation, and litigation are the primary drivers for change in DC plans, according to results of Callan’s 2023 Defined Contribution (DC) Trends Survey, released this week.
The Callan survey, now in its 16th year, paints a detailed picture of the challenges and opportunities that are top of mind for DC plan sponsors. It covers SECURE 2.0 (pre-passage) and diversity topics, along with the key tenets of DC plan management, governance, and financial wellness.
“As our world continues to dramatically change, our DC survey has evolved to fit the rapidly shifting landscape facing DC plan sponsors,” said Greg Ungerman, survey co-author and Callan’s DC practice leader. “This year’s survey shows how some of the traditional activities we see in DC plans slowed while others required greater urgency, likely due to the twin forces of the pandemic and increased litigation.”
Some key takeaways:
• Competing priorities and strained internal resources rank as top challenges.
• Plans are actively seeking to enhance their plan and support participants, but solutions and implementation may vary based on unique pain points and opportunities.
• The pandemic had distinct impacts on DC plans, and plan sponsors are looking to implement learnings from the experience.
Callan’s DC Survey provides a benchmark for sponsors to evaluate their plans compared to peers, and to offer actionable information to help them improve their plans and the outcomes for their participants. In this year’s survey, conducted in late 2022, respondents spanned a range of industries; the top were technology, government and financial services.
Of the 99 respondents, 81% offered a 401(k) plan, 27% a 457 plan, 16% a 401(a) plan, and 9% a 403(b) plan. Nearly three-quarters of respondents had more than $1 billion in plan assets. More than two-thirds of respondents were corporate organizations, followed by public (23%) and tax-exempt (9%) entities.
A March 27 blog post from Callan summarized the key findings of the survey, but notes that the full survey contains far more detail about all of these areas and extensive breakdowns of the data gathered. What follows are some details from the summary, broken down by category.
Legislation
When it comes to legislation, the survey found that the two SECURE 2.0 initiatives of most interest to respondents were increasing the catch-up amount for older individuals and increasing the starting age for required minimum distributions (RMDs) to age 75.
The 2019 SECURE Act allowed plan sponsors with an automatic enrollment safe harbor plan design to increase the automatic escalation cap to 15%. Of plan sponsors with such a plan design, 22% indicated they have or will increase the automatic escalation cap to 15%, and another 2% indicated they have or will increase the cap between 10% and 15%.
Investment trends
More than 90% of DC plans had a mix of active and passive investment funds. Purely passive (8%) remained a rarity, while no respondents had a purely active menu.
Collective investment trusts (84%) and mutual funds (79%) were the most prevalent investment vehicles. Large plans were less likely to offer mutual funds in general and significantly less likely to offer mutual funds that are proprietary to the recordkeeper (26% of plans with more than $1 billion dollars in plan assets).
More investment trends revealed in the survey:
• In a drop-off from past years, only 35% of sponsors conducted an investment structure evaluation within the past year, while 81% have done so within the past three years.
• Only 16% of sponsors reported changing the number of funds in 2022. Roughly the same percentage indicated they are planning a change in 2023. Of those that made changes, the more common action was to increase the number of funds, while a decrease was slightly more common among those planning changes in 2023.
• In 2022, 97% of plans used a target date fund (TDF) as their default for non-participant directed monies, an all-time high.
• Among those that offer TDFs, over 8 in 10 used an implementation that was at least partially indexed. The share of active-only strategies was at its lowest point in survey history (15%).
• 52% of plans indicated they offered a target date suite only, while 45% offered the target date suite as the default along with managed accounts as an optional service.
Plan design trends
The survey found Roth deferrals (94%) and automatic enrollment (76%) were the most common enhanced savings features offered in 2022.
Notably, 6 in 10 plans used a safe harbor plan design, meaning they are not subject to annual nondiscrimination testing, minimizing the impact of a failed test.
Three-quarters of DC plans offered automatic enrollment. The vast majority used auto enrollment for new hires, while far fewer did it for existing hires. Half of plans used an auto enrollment default contribution rate of between 4% and 6%.
More plan design trends:
• Adoption of automatic contribution escalation continues to lag automatic enrollment, with 66% of plans offering the feature. The vast majority used 1% as their escalation rate.
• The average maximum escalation rate has increased notably in the past two years in response to the 2019 SECURE Act, which increased the maximum rate for automatic enrollment safe harbor plans from 10% to 15%. This was an optional provision, but nearly three-quarters of plans have set the maximum rate above 10%.
• Half of DC plans making a change to the matching formula increased the match in 2022, and another quarter plan on increasing the match in 2023.
Service providers and plan fees
Nearly half (48%) of respondents had a bundled arrangement, in which the recordkeeper and trustee are the same. The remainder had an unbundled arrangement, in which the recordkeeper and trustee are independent.
More than 9 in 10 of plan sponsors engaged an investment consultant (retainer and/or project) in 2022.
More plan fee findings:
• Three-quarters of plan sponsors calculated their all-in administration DC plan fees within the past 12 months. Another 14% did so in the past two years. Similar levels were seen for trust and custody and investment management fees.
• When calculating all-in fees, more than half of respondents also evaluated sources of indirect revenue, such as revenue shared with the recordkeeper from managed accounts, brokerage windows, or rollovers of DC plan balances into an individual retirement account.
• More than 9 in 10 sponsors benchmarked the level of plan fees as part of their fee evaluation process.
• Nearly half of sponsors cut fees following their most recent fee review.
• Two-thirds of sponsors are either somewhat or very likely to conduct a fee study in 2023.
• Four in 10 respondents are likely to move to lower-cost investment vehicles in 2023.
Participant advice and managed accounts
Nearly all respondents reported offering general guidance, while more than 7 in 10 offered advice. Advisory services were at least partially paid for by participants for 90% of respondents.
For plan sponsors with managed accounts, the vast majority (97%) offered them as an opt-in feature.
Satisfaction with investment advisory services was generally high. Financial wellness tools and full financial planning received the highest overall marks, with 100% of respondents very or somewhat satisfied.
The service with the largest percentage of dissatisfied respondents was guidance, with 9% of respondents reporting being somewhat dissatisfied.
Governance
Slightly more than half of survey respondents had a single committee to monitor and manage their DC plan, with the rest splitting the responsibilities between a separate investment committee and administrative committee.
Most had an odd number of members to avoid tie votes. Investment committees had the most members on average (6.5) compared to administration committees (5.5) or single committees (4.8). Notably, public plans investment committees had the highest number of members on average (8.8), compared to corporate plans (5.4).
Other notable governance-related findings:
• The average tenure of committee members increased from 2017, with 36% in 2022 serving more than five years compared to 28% in 2017.
• While the pandemic changed the balance between virtual and in-person meetings, in general the total number of meetings of either type fell between 2017 and 2022. Instances of committees with only in-person meetings have increased slightly since return-to-office plans have been more widely adopted.
• The survey notes a sharp increase in respondents reporting that legal counsel attended meetings, with internal legal counsel attendance increasing from 11% in 2017 to 49% in 2022 and external counsel increasing from 21% to 36%.
• The top areas of fiduciary focus were plan governance and process; investment structure evaluation; and plan investment management fees.
• To measure the effectiveness of the plan, 96% of respondents used participation rate/plan usage.
Financial wellness
Nearly 7 in 10 employers reported offering some financial wellness support. The top reason sponsors offered a financial wellness program (91% of respondents) was because it was an organizational philosophy to support employees.
More financial wellness findings:
• The top financial needs of participants were retirement savings, emergency savings, and budgeting.
• On a scale of 1-5, respondents judged their average program effectiveness at 3.5. Newer programs reported the lowest average effectiveness rate (3.0) while the most mature programs deemed their programs most effective (4.2).
• Half of respondents indicated the employer pays for the financial wellness program.
Diversity, Equity, and Inclusion
A majority of sponsors indicated an interest in expanding diversity, equity, and inclusion (DEI) efforts in their plans.
Only 1 in 10 respondents formally tracked DEI metrics in their retirement plan, which may be due in part to the limits on the data collected by payroll or recordkeeper systems. However, 90% of respondents indicated they broke out retirement plan behavior by various groups that could support DEI initiatives.
Few plans said they were currently planning changes to the investment fund lineup or plan design to support DEI initiatives.
Find the summary blog post and survey here.
SEE ALSO:
• Top Focus of 401k Plan Sponsors in 2022? Reviewing Fees