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Pensions & Investments: Commentary: One Size Doesn't Fit All DC Plans - and That's OK!

December 18, 2019

Read Ross Bremen's Op-Ed on PI's site here.

A joint study conducted this fall by NEPC and Pensions & Investments reveals DC plan sponsors are aligned on several important topics, like getting participants into a plan early, saving at sufficient levels and using diversified investments. Beyond these themes, however, we don't see overwhelming adoption of every service and investment opportunity in the market place, and we see diverging views on topics like measuring plan success and decumulation. These types of differences are OK.

In our view, one size does not fit all when it comes to the long and growing list of defined contribution services and features available to sponsors and participants. If the market desired more universal program designs, multiple employer plans would be considered ideal for all sponsors and participants and, at least today, our study does not support such a premise. Our study reveals that, at present, 57% of responders would probably not join a MEP.

In the first decade after the Pension Protection Act was enacted in 2006, there was a focus on getting participants into a plan and invested properly by implementing features and products such as automatic enrollment and target-date funds. We see support for this statement in the study results: When asked if one thing could be required by all DC plans, the top answer was automatic enrollment of all employees. Some 97% of plans offer target-date funds, and offering target-date funds as the plan default is identified as the top way to ensure that participants make appropriate investment decisions.

As we enter 2020, we believe that key actions over the next decade will be focused on defining and measuring plan success, refining plan features to better support retired participants and adjusting to what will likely continue to be an active legal and regulatory environment. According to our study results, sponsors have already begun addressing some of these topics, as 88% of plans surveyed allow former participants to stay in the plan.

Many sponsors have multiple distribution mechanisms for near-retirees and retirees:

  • 52% allow installment distributions.
  • 49% allow partial distributions.
  • 39% allow in-service withdrawals.

Lifetime income products receive conceptual support if the right products are available and fiduciaries can feel safe offering them: 52% indicated that they have or will have a retirement income solution in the next five years, and 29% indicated that if they could pass one piece of legislation, it would be an in-plan retirement income safe harbor.

We understand that when it comes to new ideas and innovations, plan sponsors may feel uneasy pursuing less common solutions following a decade-plus of well-publicized class-action litigations. In fact, our data reveals that litigation can clearly impact a sponsor's list of priorities. Sponsors listed "fees" as their second-biggest concern out of 10 choices and "litigation potential" was ranked No. 3. (For the record, lack of participation and/or low savings rates was ranked No. 1.)

We also acknowledge that plan sponsors don't operate with identical sets of circumstances. For example, a corporate sponsor confronting litigation will, understandably, have a different focus than a public sponsor that emphasizes an open pension plan. A hospital system that makes advisers available in its cafeterias will have a different perspective on education practices than a corporate plan that relies on online efforts.

Suffice it to say that the definition of "success" for defined contribution plans will require many different approaches and perspectives. It is unrealistic to think that there will be a single product or approach that solves every challenge plan participants and sponsors face. Nevertheless, we believe that plan sponsors need to be prepared to move forward. Sponsors, for example, should have a philosophy addressing whether the DC plan is just an accumulation vehicle or if it should also be designed to assist participants in their retirement years. Such assistance can come in many different forms. While in some cases, it may be an investment solution or an advice tool, in others, it may be a plan rule adjustment.

In the next decade, there will likely be fits and starts to this evolution. There are always unknowns and we rarely have watershed moments like the Pension Protection Act enactment. While some are hopeful that more data might lead to better outcomes via more personalized solutions, others worry about potential abuses. We now see limits placed on data sharing in class-action settlements to avoid predatory practices. On the rule-making front, despite challenges, legislation addressing post-retirement considerations is coming to fruition. As we enter 2020, we are confident the trend toward factoring retirement savings into a participants’ overall financial well-being will continue. Sponsors can hope for another watershed moment to address new services and features (We may have it with the SECURE Act, which was attached to a spending bill), but until then, sponsors should embrace recent innovations in plan design and dig into their data to tailor the plan to the specific needs of their participants.

Topics: Press, Press Coverage

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