By offering defined contribution (DC) plans with features such as auto-enrollment and auto-escalation, plan sponsors are giving employees a fighting chance to improve the quality of life they’ll have in retirement. But why stop at a fighting chance when there’s an opportunity to make a life-changing difference?
For plan sponsors willing to revisit and reimagine their approach to the core components of DC plan design – accumulation, decumulation, and purpose—the impact on their employees’ retirement can be profound.
Accumulation: Build the confidence to stay the course
The primary objective during the accumulation phase is clear: grow assets. To achieve this goal, plan participants must understand the long-term growth potential of investing in equities, and the power of staying invested. Too often, market volatility shakes confidence and drives participants to sell at the wrong time or stay on the sidelines for too long. Some may even contribute less to their 401k plan out of fear of a downturn.
In 2021, the Schroders US Retirement Survey found that plan participants had approximately 20% of their assets in cash on average. That’s a significant sum that’s not contributing to growth, as keeping one-fifth of retirement assets out of the market for any period of time can have a meaningful impact.
To help participants remain invested during periods of volatility and uncertainty, plan sponsors should consider offering growth strategies that provide meaningful diversification from core holdings such as US large-cap stocks.
Actively managed international stock portfolios could be one option. Since 2011, an average of 78% of the highest performing stocks worldwide have been based outside the US.
Due diligence can help identify active international funds that provide consistent, top-quartile returns, high active share, and a clear, disciplined approach to finding superior companies. International funds should also have non-correlating characteristics relative to US growth stocks to help lessen the blow a correction might have on investor confidence.
Decumulation: Close the gap
Plan sponsors—along with the rest of the industry—have made accumulation the highest priority, and with good reason: turning retirement savings into adequate income requires sufficient assets.
“Clearly, helping participants invest their retirement savings with purpose can have a ripple effect …”
But it’s time that the DC marketplace place decumulation on equal footing with accumulation.
According to the aforementioned survey, 82% of 401k plan participants are concerned that they don’t know how to generate retirement income or draw down their assets in retirement. That’s a significant number of people in or heading toward retirement with no idea of what to do.
By offering more education on decumulation strategies, access to advice on drawing down assets, and strong in-plan retirement income solutions, employers can deliver much-needed help that can make a difference in participants’ lives.
Purpose: A catalyst for higher savings
Last October, the US Department of Labor (DOL) released proposed rules indicating, “climate change and other ESG factors are often material and that in many instances fiduciaries should… consider [such] factors in the assessment of investment risks and returns.”
While the DOL is currently reviewing the feedback they have received on this proposed rule, the cloud of uncertainty appears to be lifting with regard to ESG funds in DC plans. And that’s good news for a lot of plan participants.
According to our research, nine out of 10 plan participants who are aware of the ESG options in their plan said they invest in them. Even more compelling, nearly 70% of plan participants said they would consider increasing their 401k contribution rate if they had ESG options.
Clearly, helping participants invest their retirement savings with purpose can have a ripple effect that positively impacts society and 401k balances.
Plan sponsors can make all the difference
Without question, the retirement readiness of American workers needs to improve. The Schroders US Retirement survey found that just 26% of workers nearing retirement felt they had saved enough.
Plan sponsors are in a unique position to help solve this challenge and improve participants’ quality of life in retirement by reevaluating their plan’s approach to accumulation, decumulation, and purpose to ensure their participants have the knowledge, solutions, and support to meet their goals at and through their retirement.
Deb Boyden is Head of US Defined Contribution at Schroders.
Deb Boyden is Head of U.S. Defined Contribution with Schroders.
