DC plan participants prioritizing returns over principles

Increased interest in incorporating ESG principles in defined contribution retirement plans, leveraging collective investment trusts (CITs) and offering financial wellness tools as a value-add are some of the latest trends on the minds of consultants and advisors, according to T. Rowe Price’s 2021 Defined Contribution Research Study conducted in partnership with Schaus Group.

Michael Davis, T. Rowe Price’s head of defined contribution plan specialists, told Benefits PRO that the survey responses from 32 consultant and advisory firms jibes well with data that the Baltimore-based recordkeeper has also collected from 6,400 plan participants and more than 450 plan sponsors.

Survey results revealed key themes:

Strong interest and dialogue around adopting ESG principles. 

“Consultants and advisors said that plan sponsors are interested in ESG principles primarily to increase positive engagement with participants and to align with sponsoring entities’ sustainability goals,” Davis says.

“The majority of plan participants are willing to allocate to ESG, but their primary interest was in investment return. When asked if they had to choose between the two, more participants preferred investment returns over ESG principles, which we thought was interesting.”

With respect to implementation of ESG, 40 percent of study respondents indicated preference for actively-managed ESG investment strategies; only 10 percent said passive ESG investment strategies were preferable.

Additionally, respondents indicated that more detailed ESG screening, reporting and monitoring should be provided by investment providers.

While there is broad interest in ESG, the majority of respondents report that plan sponsors are looking for further clarity on the Department of Labor’s proposed guidelines before making ESG investments a part of DC plan investment options.

“A lot of plan sponsors are concerned about the vacillation in the rule from administration to administration, and they are looking for more consistency in the rules regarding what they are able to offer under ERISA,” Davis says.

Support for the continued evolution of target-date investments and retirement income solutions.

In particular, consultants strongly support an increased focus on collective investment trust-based target dates and the pursuit of blend solutions that deliver the benefits of both active and passive investment management.

Of note, these cost-containment trends received greater support than simply increasing the use of passive investment management.

“We find that collective investment trusts are one of the most desired types of target date investments,” Davis said.

“For so many years consultants and advisors liked mutual funds as a vehicle because they are so easily accessible. But now collective investment trusts are a preferred vehicle for those who are eligible because they can be more flexible, they can be offered at a lower price point and they don’t have a lot of the marketing and reporting requirements that come with mutual funds.”

Growing interest in financial wellness programs, especially in response to the COVID pandemic.

Addressing greater financial wellness, 76 percent of consultants report that plan sponsors signaled greater interest in emergency savings, and 60 percent report greater interest in debt management. In contrast, most respondents reported fewer than 25 percent of their plan sponsor clients currently offer emergency savings  programs.

More positively, 83 percent of plan consultants expect this figure to increase in the next three to five  years.

“Financial wellness as a category of offerings garnered significant interest,” Davis says. “The drive is primarily to improve overall worker satisfaction and retention, particularly now in this era of the Great Resignation.”

Plan participants are interested in education tools to help them think about retirement saving, and how they should access them as they move into retirement, he says. They also want to be educated about non-retirement savings, as well as help with budgeting, health care and managing debt.

Staying in-plan, retirement income solutions, DE&I

When looking at features that could strengthen the trend of participants remaining in their DC plans post-retirement, lower cost for comparable investments versus a rollover IRA, flexibility in drawing down assets, and investment solutions that generate income were ranked highest.

Respondents also report simple systematic withdrawal capabilities as the most appealing retirement income solution despite limitations. However, multi-asset investment solutions – managed accounts with  income planning features and target date investments with embedded managed payout features – follow closely behind.

Additionally, respondents are seeing plan sponsors evaluate investment managers’ diversity, equity and inclusion baseline reports to satisfy basic due diligence. However, further integration of DE&I information into plan and investment decisions may require evolution, as only 31 percent of plan sponsors are using DE&I information to actively drive decisions on new investment options.