Part Two: Building momentum with plan design
With proactive plan design programs, plan sponsors can offer effective strategies to help position more participants on stronger retirement investment paths.
Our fourth biennial Defined Contribution (DC) Plan Sponsor Survey offers insights into the power of being proactive to help position more participants for greater retirement funding success. This year’s research highlights how proactive plans and proactive advisors and consultants are more likely to offer industry best practices and experience higher levels of overall satisfaction across a broad range of metrics. We present these findings in four parts covering plan sponsor goals, plan design, target date fund (TDF) usage and working with advisors and consultants.
What do plan sponsors hope to achieve with their plans?
There are a number of reasons a company may want to offer a DC retirement plan, but at a very fundamental level is often the responsibility many companies feel toward helping employees with their overall financial wellness. This sense of duty appears to have grown over the years. Indeed, almost three out of four plan sponsors (74%) now indicate they have a “very high” or “somewhat high” commitment to employees’ fiscal health—a 25% increase from 2013, when we conducted our first DC Plan Sponsor Survey.
74% of plan sponsors feel a strong sense of responsibility for employee financial wellness, up from 59% in 2013
EXHIBIT 1: AS AN EMPLOYER, WHICH OF THE FOLLOWING BEST DESCRIBES THE LEVEL OF RESPONSIBILITY YOU FEEL FOR THE OVERALL FINANCIAL WELLNESS OF YOUR EMPLOYEES?
In terms of specific DC plan goals, more than 80% of plan sponsors note that showing employees they care, overall employee compensation levels, employee retention and recruitment, and the prevalence of DC plans as a company benefit are all important reasons they offer their plan. Employee morale and retirement financial security are also frequently noted as highly important, though to a slightly lesser extent.
There is often a sizable gap, however, between the importance plan sponsors place on their goals and how successful they believe their plans are in achieving them. Notably fewer consider their plans “extremely” or “very” effective, and these success rates appear linked to how plan sponsors philosophically approach structuring and managing their plans, as discussed in the sections that follow.
A key component of plan design is how to approach participant decision-making. There are two main high level philosophies plan sponsors tend to take toward participant decisions:
In this year’s survey, 59% of plan sponsors say they focus on participants making their own choices, while 41% believe in proactively placing participants on a strong saving and investment path. Of note, sponsors of larger plans (those with more than $250 million in assets) are 50% more likely to identify as proactive compared with sponsors of smaller plans (61% vs. 41%).
How plan sponsors see their philosophical role naturally affects how they approach managing their plan. Generally speaking, proactive-philosophy plan sponsors are more likely to utilize industry best practices in terms of getting participants into the plan, helping them to contribute more and targeting communication efforts.
EMERGING TREND : RETIREMENT INCOME SOLUTIONS
While our past surveys have focused primarily on accumulation strategies, today many plan sponsors also see providing retirement income solutions to help with decumulation as a plan responsibility. This year, we asked specifically about the role of retirement income in DC plans and found that 53% believe these plans should be vehicles for retirement income generation. Moreover, 54% believe they as plan sponsors have a level of responsibility to offer retirement income solutions to participants. Given the growing number of participants anticipated to soon start entering retirement based on demographic trends, we expect this to be an exciting area of development and will continue to evaluate it in future research.
Interestingly, plan sponsors who follow a proactive philosophy are consistently more likely to consider their plans successful in achieving their goals. This is particularly true with goals related to participant financial well-being. For example, approximately 70% of proactive-philosophy plan sponsors believe their plans are “extremely effective” or “very effective” in helping to ensure participants achieve a financially secure retirement and are able to retire at their targeted ages—a more than 50% increase over hands-off-philosophy plans.
Our related 2018 DC Plan Participant Research shows participants also usually appreciate more proactive guidance. For example, 79% believe their employers should encourage employees to contribute to their company retirement plans, and 58% believe their employers should provide a viewpoint on how much to contribute.
This year’s survey research suggests that there is a clear disconnect between the large number of plan sponsors who feel a high level of responsibility for employee overall financial wellness and the much lower number proactively positioning participants for saving and investing success. While usage of automatic plan features has grown considerably since our first survey, many plan sponsors still seem reluctant to take a more proactive approach to plan design, as shown by some of our findings in “Part Two: Building momentum with plan design.”
However, taking a more proactive philosophical approach appears to offer a strong win-win for both participants and plan sponsors. We have repeatedly found that the majority of participants crave more guidance in making retirement saving and investing decisions, and consistently rate a high level of satisfaction with proactive plan actions, such as automatic enrollment, automatic contribution escalation and re-enrollment initiatives. With this year’s survey results, we now also see that proactively minded plan sponsors are more likely to believe they are achieving success with their plans than plan sponsors who follow a more hands-off philosophy when it comes to participant decision-making.
In our view, the increase in the share of organizations with a proactive placement philosophy may be driving some of the progress we see in our latest survey results. Should this philosophy continue to gain ground, it may have the potential to speed the pace of DC plan evolution.