Top 10 Priorities for 401(k) Plans in 2018

“DC plan sponsors today have multiple operational and investment challenges to manage,” Liana Magner, US Delegated Leader with Mercer, said in a statement. “There is also an increasing sense of feeling responsible for participants’ financial well-being and success in retirement.”

As such, she adds, sponsors are starting to” integrate three major areas within their purview: improving participant engagement and decision-making, adopting strategies that enhance returns and prudently reviewing fees.”

In some cases, the lowest fees may not yield the best outcome, she rightly notes, and “sponsors today are looking more holistically to create effective, strategic plans that have better diversification and additional plan support.”

Therefore, top Priorities for DC plan sponsors for 2018 include:

1. Ensure sound plan management: Creating a foundation structured around enabling robust decisions and governance principles such as regular performance meetings, vendor and fee reviews etc. can protect a plan’s fiduciaries should litigation claims arise.
2. Conduct a financial needs analysis for employees: Understanding what issues a sponsor’s employees are facing is critical and yet often overlooked. Once sponsors understanding employees’ needs they are better equipped to deliver more relevant, effective solutions.
3. Targeted engagement efforts: A clear communication strategy that simplifies decisions and drives engagement can enhance participant outcomes. Sponsors should consider segmenting their population based on key economic and demographic data; driving action through creating simple investment tiers; offering binary choices where possible; and customizing priorities based on the key needs of each segment.
4. Establish success measures: Once employees’ needs are evaluated and strategies are developed, establishing and monitoring success measures along with adjusting strategies as required can help enhance participant outcomes.
5. Consider ESG options: Environmental, social and governance (ESG) factors should be evaluated and considered as part of the plan’s manager evaluation program, and consideration should be given to introducing ESG focused options into the plan line-up – which may encourage participation.
6. Enable ‘rainy day’ savings funds for employees: Mercer’s Inside Employees’ Minds^TM financial wellness survey reported that 52% of workers would find a $400 unforeseen expense either difficult to cover (but would manage it) or a major crisis. The industry is beginning to explore parallel retirement and “rainy day” savings accounts. These are in their early days but could prove very effective.
7. Increase diversification: Multi-manager funds provided through a white-label structure can offer great benefits, including reduced manager risk, broader diversification, simple naming conventions that are easy for members to understand, and the ability to quickly and efficiently switch out managers when needed. More activity in the diversified fixed income area, in particular, is expected in 2018.
8. Consider financial wellness solutions: Some financial wellness needs cannot be addressed by the DC plan. As such, plan sponsors should consider exploring financial wellness solutions that address specific needs, such as financial coaching, student loan repayment plans, short-term loans and income smoothing.
9. Evaluate managed accounts: Although managed accounts are not a new addition to the DC landscape, their role is evolving since their cost has been decreasing; the ability to tailor asset allocation advice to personal circumstances, even if participants don’t input information themselves, has increased significantly and they provide additional support for retirees and broader financial wellness needs
10. Examine retiree-focused tools and investments: Plan sponsors appear to be allowing — and even encouraging — retirees to remain in the plan post-retirement and to take partial withdrawals. Hence, sponsors should consider how suitable is the investment structure for retirees? There may be a place for some investment options more aligned with retirees needs. Sponsors should also think about how both retirees and pre-retirees can be materially advantaged by being given good guidance. For example, extensive research shows that one of the best options for a retiree to explore is when to take social security benefits.

“Plan sponsors that prioritize their goals and objectives strategically have the opportunity to both enhance participant outcomes and mitigate risks,” Sarah Fitzmaurice, DC & Financial Wellness Leader with Mercer, concluded. “The most dominant trend we are seeing right now in DC plan management is the move to delegating responsibilities to a professional organization. We view delegation as more than risk mitigation; we also see delegation as a path to help improve their participant outcomes.”