Nowadays, employees have to “opt out” more than they have to “opt in” when it comes to company retirement plans—significantly more than 10 years ago, according to NEPC’s just-released 2019 Defined Contribution Plan and Fee Survey.
The survey found 76% of corporate retirement plans and 54% of healthcare plans have included an automatic enrollment feature into their plan designs as a measure to help increase overall plan participation.
Of the plans that incorporate auto-escalation, almost half (48%) offer it as an opt-out feature—a significant change from 2010 when 72% of plans that offered auto-escalation indicated they required participants to opt-in to this feature.
The survey from NEPC, LLC, one of the industry’s largest independent, research-driven investment consulting firms, looks at trends in the management of retirement plans by examining the prevalence of plan features relating to increasing savings rates such as the adoption of auto features, professionalizing the investment decision, and facilitating the distribution of assets at retirement.
The results show how plan sponsors are using innovative strategies to address many of the unique challenges posed by the “new American retirement.”
For those plans with more than $1 billion in assets, 24% offer participants custom target date funds tailored to participant characteristics, likely as a strategy to better control the glide path and investment allocations.
“Americans simply haven’t saved enough for retirement, which is motivating many plan sponsors to reassess plan design, menu options, and distribution features to create meaningful solutions,” said Ross Bremen, Partner at NEPC and a member of the firm’s Defined Contribution Practice Group. “Concurrently, employers and sponsors are feeling the pressure to deliver competitive solutions that help recruit top talent, reduce costs and threats of litigation, while also helping deliver on sponsors’ fiduciary responsibilities. The SECURE Act is a watershed moment that will likely help plan sponsors on all these fronts by creating a new market for open multiple employer plans and empowering sponsors with the ability to include more lifetime income products.”
Key survey findings include:
- Auto-features have been broadly adopted: Plan features like automatic enrollment and automatic escalation are widely considered solutions to the retirement savings problem, as inertia has proven to be a very powerful behavioral trait. Sixty-eight percent of plans offer auto-enrollment and 53% offer auto-escalation features. These features help bring the total participation rate among all plans to 81% (83% for employer-sponsored retirement plans and 70% for healthcare plans).
- Investment menus have stayed largely the same: The number of core menu investment options (11) and the provision of target date funds (offered by 96% of plans) has remained relatively stable over the past several years. What has changed is where participants have their assets invested, with 39% of plan assets now invested in target date funds, on average.
- “Retiree-friendly” distribution features are common:The majority of plans surveyed offer several types of distribution options, including lump-sums, partial withdrawals, installment payments and in-service withdrawals.
Fees continue to be a focus for most plans, with investment fees constituting the majority (80%) of a sponsor’s total plan cost. Plan administration fees account for 14% of total costs. Over half (53%) of all respondents indicated that fixed dollar contracts are their preferred method of contracting plan administration fees, followed by fixed basis point (22%) and bundled contracts (21%).
The remainder of the total cost is attributed to additional fees earned by recordkeepers for ancillary services such as loan origination, loan maintenance, QDROs, and managed accounts. As recordkeeping and investment management fees have come down over the last decade, service providers have looked for ways to recapture lost revenues. In some cases, these “other” fees can even be larger than the recordkeeping fee.
While some believe managed accounts would be a key solution that addressed participants’ retirement concerns via personalized advice, NEPC’s survey shows only 37% of plans utilize this investment feature—likely due to the increased costs attached to these accounts.
ESG menu still light
While Environmental, Social and Governance (ESG) investing continues to be a key discussion topic around the financial world, adoption of ESG-related plan menu options has not mirrored ESG adoption in other sectors.
Just over 8% of all plans offer an ESG-related option. The type of plan is a large driver of adoption, with over 13% of healthcare plans including an ESG option as compared to just 4% of retirement plans.
For more information on NEPC’s 2019 Defined Contribution Plan and Fee Survey, click here.