A new report from Vanguard shows the majority of its global retirement plan clients—some 90 companies holding $650 billion in plan assets across three or more countries—have taken steps recently to streamline and centralize retirement plan administration.
The main reasons given for this trend towards centralization and simplification were policy/organizational efficiency and risk management. As noted by Vanguard, respondents were clear that full centralization remains an elusive and likely unattainable goal, given local market rules and regulations that can vary both within and among countries. Vanguard says even companies operating in just one country have to keep abreast of an impressive amount of benefits and investing law—and going international brings a significant set of challenges.
Interestingly, both small and large international organizations are exploring opportunities around greater centralization of benefits and HR administration. Large organizations appear the most energized and engaged in the conversation, however, in part due to their ability to create greater economies of scale.
Some trends appear to be playing out the same internationally as in the U.S., including the sweeping transition from a predominantly defined benefit (DB) to a predominantly defined contribution (DC) approach to retirement benefits. International plan sponsors seem to be even harder pressed to find sufficient time and resources to manage legacy DB offerings while ensuring newer DC plans offer enough value for participants.
On average, 58% of international sponsors’ time, resources and effort is spent on DB plans, Vanguard says, compared with 38% on DC plans. In a sign that the U.S. is perhaps ahead of the long-term trend, the figure for time spent on DB plans rose to 71% for non-U.S. headquartered respondents.
Vanguard researchers conclude DB plans will continue to consume significant resources for both U.S. and international sponsors, while support for DC plans will also need to grow as their popularity grows among workers.
“Something will need to give,” the report continues. “Either resources and costs will need to increase, or plan sponsors will need to find ways to simplify the structure and approach to their global retirement plans.”
Vanguard finds liability-driven investing (LDI) is a popular theme both in the U.S. and abroad, as sponsors focus more on smoothing and controlling return streams than on maximizing risk and returns. Of the various implementation methods explored for LDI, a glide-path approach was the most popular. When awarding investment mandates—especially passive investing mandates—fees and tracking error were considered the most important factors in assessing managers and investment funds. Net costs are a significant consideration, Vanguard says, when sponsors are deciding on an active manager, but the investment strategy and manager experience/performance record are more important.
When asked how they expected the level of company contributions to DC plans to change in the next five years, 57% of international sponsors said they anticipate a moderate increase, while 14% will increase their contributions dramatically. Vanguard concludes that an increased attitude of shared responsibility for DC plan outcomes among plan sponsors, in the U.S. and globally, will drive funding approach changes in the years ahead.
The full survey summary can be downloaded here.