Plan sponsors seek innovation in DC plan design beyond auto-enrollment
As employees face short-term stressors, plan sponsors look for new ways to bolster retirement readiness and improve financial resilience.
Innovation in defined contribution (DC) plans is becoming increasingly prevalent as such plans become more firmly entrenched as the primary vehicle by which Americans save for retirement. Auto-enrollment features and target-date funds (TDFs) are now common plan design features, but a variety of new innovations are beginning to attract the attention of plan sponsors as they seek to help employees achieve financial resilience and build an adequate retirement.
DC plan features important to attracting top talent
More than three-quarters of plan sponsors offer DC plans as their sole retirement option to new employees, and 90 percent of plan sponsors said they understand that DC plans are important for attracting top talent and maintaining a competitive organization, according to a survey of 464 plan sponsors conducted by Willis Towers Watson.
Automatic enrollment. According to the 2020 Defined Contribution Plan Sponsor Survey, automatic enrollment is included in about 76 percent of plans, up from 52 percent in 2009. In plans that enroll employees automatically, participation is about 89 percent, compared with 72 percent in plans that do not automatically enroll.
Inclusion & diversity strategies. There is also a significant trend toward integrating inclusion & diversity (I&D) strategies into DC plans extending to plan provisions, governance structure and retirement outcomes, said the report. Nearly two-thirds of sponsors have reviewed or plan to review their plans’ moves toward I&D, and one-third have followed up with a change, said the report.
Emergency funds. Gaining in popularity are features designed to help employees create emergency funds through Roth plans or other after-tax contributions, with 26 percent of plan sponsors already offering this option and 19 percent indicating they are interested in offering it.
Student debt repayment. Plan sponsors are also interested in linking debt repayment to their DC plans by allowing employees to work down their loans while benefiting their contributions toward retirement. While only 2 percent of sponsors have adopted this option, 19 percent are strongly attracted to it and an additional 58 percent had moderate interest in it, according to the survey.
Other plan features in which sponsors showed interest are student loan repayment assistance, flexible benefits choices and directing paid time off to DC plan contributions.
“It is encouraging to see the many efforts sponsors are making to broaden their plans’ features while building greater flexibility into their plans,” said Alexa Nerdrum, managing director, retirement, Willis Towers Watson. “Evolution in DC plans will encourage employees toward greater reliance on these plans, navigating their financial stresses in the present and enabling them to continue saving for retirement as well.”
Retirement distribution strategies. Plan sponsors are also looking to innovate in retirement distribution strategies. Today, about 16 percent of plans offer lifetime income options within their plan and 6 percent offer this option outside of the plan. Up to 15 percent, however, are considering adding a lifetime income option, which represents a significant change in the three years since WTW last surveyed plan sponsors in 2017.
Investment mix. Plan sponsors are also changing up the investment mix they offer to DC plan participants. TDFs are nearly ubiquitous across plans, and nearly half of plans have streamlined their investment options to make choices less confusing. In addition, plan sponsors are paying closer attention to the performance of TDFs with 40 percent monitoring the TDF glide path from a demographic perspective. Custom investment options are also becoming popular, allowing employees to diversify from public equity and fixed income markets, although only one in six companies surveyed said they have built that into their plans.
“With the confluence of events over the last 12 months and the continued trend of DC plans evolving from primarily a retirement savings vehicle to a comprehensive lifetime savings account and retirement spending vehicle – plan sponsors have the opportunity to reimagine their plans,” said Michele Brennan, U.S. DC solutions leader, Willis Towers Watson. “Today and going forward, the types of investments available need to innovate and work harder so as to align with each participant’s multiple time horizons and increased reliance on DC Plan assets for retirement income.”
While innovating, be aware of risks
While focusing on innovation, however, plan sponsors need to be aware of risks, said the survey. Most respondents (75 percent) have benchmarked their recordkeeping fees over the past three years and about two-thirds of respondents said benchmarking has resulted in lower administrative fees.
Other concerns include cybersecurity, with up to 70 percent of plan sponsors expressing some level of concern about the safety of participant assets, particularly as remote work during COVID-19 has potentially increased exposure of personal information.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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