Plan sponsor priorities for 2024: Top 401(k) areas of focus to match participant needs

The defined contribution plan space continues to be challenging as the Great Resignation of a couple of years ago has given way to uncertainty in the capital markets along with increasing financial concerns among plan participants.

Benefit teams have yet to see much relief and continue to be asked to do more with less, according to the Top considerations for defined contribution plans report from Mercer previewing 2024 for plan sponsors. The firm outlined six areas plan sponsors can focus on to meet new challenges and embrace emerging opportunities to help their participants attain a financially secure retirement.

No. 1: Evaluate investment trends

Plan sponsors would be wise to look at how evolving capital markets are creating subtle changes to investment strategies, said Katie Hockenmaier, partner and defined contribution research director at Mercer. Four areas to watch are large-cap growth, managed accounts, target-date funds and capital preservation.

In particular, Hockenmaier said managed accounts continue to increase in prevalence and more participants are using them.

“We’re seeing new entrants into the managed account space,” said Hockenmaier. “One thing we want to highlight here is that having a managed account solution and monitoring it is a fiduciary responsibility. Be wary of anything that is very low cost and verify that it will continue to provide your participants with a very sound investment methodology.”

Hockenmaier said target date funds are also becoming a crowded space in the marketplace and managers are continuing to look for ways to differentiate their products to gain market share through ESG, personalization and retirement income.

“While some of these nuances are very interesting, we think that the path forward for a lot of target date funds is going to be around supporting decumulation,” said Hockenmaier.

No. 2: Survive the squeeze

HR departments continue to face resourcing pressures and personnel turnover at the benefit plan staff level, which impacts the capacity to manage employee benefit plans. Holly Verdeyen, defined contribution leader and partner at Mercer, said delegating existing staff or committee responsibilities could be a potential solution.

“Delegation can help key employees at your organization get out of the weeds and allow them to reprioritize strategic initiatives,” said Verdeyen.

Another area where plan sponsors are feeling a squeeze is in active investment returns as plans become more passive and publicly traded investments and private asset investments decline.

“This dynamic is really beginning to put the squeeze on DC plan participants who are seeking active investment returns,” said Verdeyen. “We’re encouraging our clients to start to entertain whether or not down the road private assets like real estate infrastructure, private equity and private debt, could be appropriate for your plan in a multi-asset construct.”

No. 3: Think like a participant

In today’s low unemployment environment, employers are challenged to develop effective retention strategies. Focusing on the needs of individual employees can help increase engagement, productivity and retention.

“We all know that compensation is king,” said Amy B. Reynolds, defined contribution practice segment leader and partner at Mercer. “But how else can we improve the relationship with employees and frankly, how do we sweeten the pot/?”

Reynolds said DC plan design is shifting to more variability and flexibility rather than a one-size-fits-all approach. Options include HSAs, 529s, emergency savings programs, student loan matches and wellness programs. However, Reynolds said employers should be careful not to create confusion for employees already unsure how to maximize the value of their benefits.

“We think it’s important to first take an inventory of what you offer and consider supplemental features that are available to 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,” said Reynolds.

No. 4: Navigate retirement income

Participants are sticking around longer in their employer-sponsored plans after their service to their employer ends.

“Many plan sponsors have already established a philosophy around participants staying in plan, and generally the philosophy has been that participants sticking around longer is a good thing,” said Verdeyen. “The implication of that, though, is that if participants are sticking around longer, especially into retirement, then we as plan sponsors need to provide participants with tools and strategies to help participants generate sustainable lifetime income.”

SECURE 2.0 provides some tools to address lifetime income.

“From our perspective, retirement income is showing up everywhere – in recordkeeper resources, recordkeeper tools, target date funds and managed accounts,” said Verdeyen. “It’s showing up as annuities, retirement savings distribution options, and also in new in-plan guaranteed income products. So there is a tremendous amount of innovation and research and development in this space, and for that reason, we anticipate that evaluating retirement income solutions will be a requirement for plan fiduciaries within the next five years.”

No. 5: Hire a Chief Risk Officer?

The industry experienced more cyber risks last year, particularly impacting third-party partners behind the scenes from an administrative perspective. This has led to increasing questions about controls, oversight and reporting associated with downstream providers.

Plan sponsors need to understand where contractual responsibilities lie as well as the practical aspects of how recordkeepers are providing oversight and what notification procedures and protocols are in place to deal with data breaches. Because ERISA plans are carved out of most corporate cybersecurity insurance policies, plan sponsors need to identify and mitigate risks.

In 2023, the industry saw its first jury trial and also saw a broadening of legal challenges around brokerage windows, forfeitures and ESG. Plan sponsors need to focus on process and documentation, investment and recordkeeping fees, and contract reviews.

“We’ve all heard the saying that no good deed goes unpunished and unfortunately 2023 didn’t bring sponsors or committees any relief from the risks associated with sponsoring a defined contribution plan,” said Reynolds. “We don’t expect 2024 is going to be much different as the creativity of fraudsters and plaintiff’s counsel seems to know no bounds.”

No. 6: What is your AI Plan?

Hockenmaier said being early in the artificial intelligence space in terms of simply starting a dialogue will be important this year.

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

AI will touch the retirement space in many ways, including participant communications, fee disclosures and QDIA notices. In addition, AI will facilitate nuanced personalization that could help participants engage with their plans, which could help participants make the most of investment opportunities and plan design features while mitigating plan leakage. AI presents a big opportunity from a data analysis perspective, said Hockenmaier. By analyzing participant data, AI may help plan sponsors predict participant needs and proactively engage with them by developing and customizing solutions. Finally, many investment managers already are taking advantage of advances in AI, said Hockenmaier.

“Starting the dialogue today with your providers is going to be crucial, especially because with all of these opportunities, there is a huge potential for risk and the need to mitigate that risk as it relates to privacy concerns and cybersecurity concerns,” said Hockenmaier.