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Moving the needle on defined contribution plans

Investments|Retirement
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May 27, 2021

Does your DC plan need a reset? Learn how plans sponsors can leverage three areas—inclusion and diversity, plan purpose, and plan management — to move the needle for their participants.

The Covid-19 pandemic has challenged all aspects of our business, personal, and financial lives, but on the whole, defined contribution (DC) plans—and their sponsors and participants—showed great resilience. Still, the experience brings a unique opportunity to reimagine and refresh their plans for the post-pandemic period. In this paper, we consider how sponsors can move the needle in three important areas—inclusion and diversity, plan purpose, and plan management.

Moving the needle on I&D

  • Target specific cohorts: Participant cohorts bring differing abilities to save and accumulate assets to their plans. Sponsors can adapt their periodic reviews of benefits and their design, features, and communication to ensure that all groups are presented with, and taking the best advantage of, the participation and savings opportunities the plan offers, and the achievements of those groups at various career stages.
  • Extend I&D to the committee composition: I&D at the plan level can also be approached by reassessing committee make-up, to see that the diverse groups get a seat at the policy-making table. Diversity of committee members’ backgrounds can also be assessed.
  • Include culture and diversity when assessing asset managers: I&D warrants consideration outside the plan as well, extending to the asset managers engaged. The cultures and diversity of investment firms have become areas of focus for institutional investors and consultants, and accordingly, we have devised a 25-factor system for scoring investment firms on the ethnic and gender diversity of investment teams.
  • Take an inclusive approach: Sponsors should assess the current financial state of plan participants to ensure the diverse needs of their workforce are being addressed. Boosting the financial wellbeing of plan participants can drive improvement of plan outcomes and allow all demographic groups to better understand and engage with the benefits being offered to them.

Sponsors should assess the current financial state of plan participants to ensure the diverse needs of their workforce are being addressed.

Moving the needle on reimagining plan purpose

  • Revisit plan structure: Sponsors have the opportunity to reassess plan design, both at the foundational level of how employee and employer contributions are structured, as well as the types of innovative features that can be incorporated to help enhance employees’ financial resilience (e.g., emergency savings, student loan assistance, employee choice).
  • Take stock of participants’ financial wellbeing: DC plan designs are now being contemplated to take into account the employee’s overall financial resilience and wellbeing, and are evolving beyond a supplemental retirement savings vehicle to a lifetime savings account – to be used to help manage the finances over the course of an individual’s lifetime. 
  • Evaluate investment vehicles: Employers can also better align plan purpose by re-thinking the investment options available to plan participants:
    • Revisiting the underlying investment allocations in the plan’s qualified default investment alternative (QDIA) to leverage alternative assets, such as direct real estate, private equity, and hedge funds can boost participants' returns while increasing diversification. Recent guidance from the Department of Labor appears to reduce the related risk for DC plan fiduciaries.1
    • Employers can also consider replacing traditional mutual funds in the core investment lineup with multi-manager white label funds. These investments, too, can seek high risk-adjusted returns while providing an additional element of diversification, often at lower fee levels.
    • Participants need help in converting their savings into durable streams of retirement income. In our 2020 survey of DC sponsors, roughly 1 in 3 employers reported that they are currently offering, or considering, in-plan retirement income options—a four-fold increase in interest from 2017. Just as organizations went through a learning period and takeoff for target date funds as QDIAs, employers need to educate themselves, and their workforces, on the benefits of the array of lifetime income solutions.

Roughly 1 in 3 employers reported that they are currently offering, or considering, in-plan retirement income options

Revisiting plan management

Managing DC plans becomes increasingly more complex each year, with the ever-evolving landscape of legislative and regulatory changes and the accompanying array of challenges and opportunities presented to employers on a continual basis. Likewise, recent CARES and SECURE Acts need to be interpreted and built into plan designs. And the impact of the Covid-19 pandemic on economic and business conditions demands its own attention.

Moving the needle on plan management

  • Explore decision support tools: Sponsors are increasingly taking advantage of new tools to track participant savings, investing and withdrawal behaviors to better align plan benefits/tools/resources with improved participant outcomes.

DC OCIO engagements are up 150% since 2017

  • Consider outsourcing: Many organizations are taking their governance focus to a higher level, by delegating the choices and monitoring of plan investments to an outsourced chief investment officers (OCIOs). In fact, DC OCIO engagements are up 150% since 2017 according to Willis Towers Watson’s 2020 survey of DC sponsors. These specialists tend to be in closer touch with trends in the financial markets, investment products and managers, and regulatory subtleties more so than most corporate managements, and may realize lower costs and superior returns.
  • Look into pooled employer plans: Taking outsourcing to investment and compliance experts one step further is the strategic decision to join a pooled employer plan (PEP), facilitated by provisions of the SECURE Act. PEPs can offer cost efficiencies through their scale, and as they are orchestrated by specialists, can stay on the cutting edge of product trends, regulatory developments, cybersecurity, and technological innovation. PEPs also will likely have an advantage in tackling the issue of selection and monitoring of an evolving generation of retirement income solutions.

A DC plan reset

Looking ahead to a post-pandemic horizon, DC plan sponsors have a unique opportunity to ensure that their plans, firmly entrenched as a primary source for employee savings, are best positioned to provide all employees with maximum value.

We believe that organizations can Move The Needle now by prioritizing at least one of these important areas:  Inclusion and diversity- in an effort to ensure equity in plan benefits and outcomes across all employee cohorts; reimagining plan purpose to better assist employees navigate both the asset accumulation and retirement spend-down phases; and reassessing how to best operate plans to manage risk while optimizing participant outcomes.

Disclaimer

This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers, and employees (“Willis Towers Watson”) to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

This document is based on information available to Willis Towers Watson at the date of issue and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document Willis Towers Watson has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law.

Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson, whether for its own account or on behalf of others, may differ from those expressed herein.

Footnote

1 U.S. Department of Labor: Employee Benefits Security Administration, “Information Letter 06-03-2020,” June 2020, https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020

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