Plan sponsors need to raise their game in 2024: Personalization is key to 401(k)s

During a recent webinar, three defined contribution plan experts from Mercer shared six critical considerations for DC plan sponsors in 2024. The presentation not only narrowed in on the major issues that sponsors face in the new year, but also featured action items that employers should consider as a way of tackling the issues head on.

What are you getting from your investment providers?

To start, Katie Hockenmeier, director of DC research for Mercer, suggested some key areas that warrant a “deeper dive” for investment committee members in 2024. One suggestion is looking more closely at the investment guidelines that are in place for large cap growth managers and whether they offer adequate flexibility for market conditions. In addition, she said Mercer wanted to highlight that plan sponsors should be wary of managed account solutions that are “very low cost” and should ensure that they offer “sound investment methodology.” In addition, Hockenmeier suggested that committees should be digging into target date fund providers and their approach to decumulation support for participants, while also holding thoughtful discussions surrounding capital preservation, particularly in light of high interest rates.

Is there any juice left to squeeze?

Holly Verdeyen, U.S. defined contribution leader, pointed to two “squeezes” that DC plans are seeing. The first stems from resourcing pressures and personnel turnover on employer organizations.

“Resource constraints are sometimes squeezing our clients’ ability to manage their defined contribution plans as proactively as they would like,” Verdeyen said. “We do continue to see personnel turnover on our clients’ investment committees, and also at the benefit plan staffing level.”

In addition, Verdeyen said the “juice is being slowly squeezed out of active investment opportunities for DC plan participants.”

“As our DC plans become more passive in publicly traded investments, and at the same time, access to private investments continues to be missing as a matter of course across DC plans, this dynamic is really beginning to put the squeeze on DC plan participants who are seeking active investment returns,” Verdeyen said. “It’s becoming a bit of a conundrum.”

Are you thinking like a participant?

In part to improve worker retention, Amy Reynolds, senior defined contribution consultant, said DC plan design is showing more variability in recent years, moving away from a one-size-fits-all environment to emphasize individuals’ unique needs and improve participant access. However, employers must be sure not to confuse participants with too many options.

“We think it’s important to first take an inventory of what you offer and consider supplemental features that are available through the benefits that you already have in place to provide a little bit more clarity on where your existing offerings might be able to be expanded and where your gaps actually exist,” Reynolds said.

Whatever approach employers take, Reynolds said, “understanding the likelihood of utilization is key. How do you engage people with a plan and make sure that you’re providing the benefits that are going to give them the most benefit?”

How will participants navigate their retirement income needs?

As data shows that retirement plan participants are remaining with employer-sponsored plans longer, Verdeyen said a key question is, “how are we going to navigate their retirement income needs?”

“If participants are sticking around longer, especially into retirement, then we as plan sponsors need to provide participants with tools and strategies in the employer-sponsored defined contribution plan to help participants generate sustainable lifetime income,” Verdeyen said.

Does your DC plan need a chief risk officer?

Reynolds said 2023 did not bring plan sponsors or committees any relief from the risks associated with sponsoring a defined contribution plan, and “we don’t expect that 2024 is going to be much different.”

Litigation is among the top concerns, especially as the focus of lawsuits broadened into new areas such as brokerage windows, forfeitures and environmental, social and corporate governance, Reynolds said. With the threat of litigation in mind, Reynolds said process and documentation should be priorities for investment committees. In addition, she recommends establishing a cadence for governance items and reviewing contracts to make sure committee members understand the plan sponsor’s responsibilities versus those of the provider and make sure that the terms and conditions are up to date, particularly as they relate to fraud protections.

The arrival of AI – how can you keep pace?

Hockenmeier said the rise of artificial intelligence has ramifications for employer-sponsored retirement plans and “it is very important to start thinking about the applications for retirement programs and everything that retirement programs touch.”

Related: A crystal-ball view of retirement plans in 2024: A 4-point plan sponsor priority checklist

In particular, Hockenmeier said AI has rich possibilities to personalize participant communications “to a very nuanced degree.”

“We believe that that level of personalization is going to help many participants to engage more with the plan,” Hockenmeier said. “It could help prevent some leakage from plans that we might see where participants start to disengage, and it can help participants to start to make the most out of all of these different plan design features.”