A majority of U.S. employers are considering implementing innovative features in their defined contribution (DC) plans to boost their value, fortify retirement savings and enhance employees’ overall financial well-being, Willis Towers Watson found in its “2020 U.S. Defined Contribution Plan Sponsor Survey.”
Sixty-six percent of employers either have or are very interested in adding at least one innovative design feature to their plan, the most popular of which is helping employees build emergency savings funds with after-tax money. Employers said they are also considering linking student loan repayment options to the DC plan, as well as allowing employees to choose between a variety of benefits, including DC plan contributions.
Robyn Credico, defined contribution consulting leader at Willis Towers Watson, tells PLANSPONSOR that the survey shows that “defined contribution plans have evolved to a fairly good place, which is critical, since they have largely replaced defined benefit [DB] plans as the prevalent source of retirement savings for employees.”
That said, Credico adds that findings from the survey point to changes sponsors should consider for their retirement benefits in 2021, some driven by the impact of COVID-19 and others that will have a longer-term effect on the financial health of employees.
“It is apparent that employers need to help people be prepared not only from a retirement perspective, but from a financial perspective,” Credico says. “That means creating a rainy day fund, to prevent participants from taking out loans or withdrawals from their retirement accounts.”
As volatility rocked the markets at the outset of the pandemic in the U.S., Credico says, recordkeeper call centers were inundated with calls from nervous participants wondering what to do with their assets. This highlights the important of offering more financial education, Credico says.
Employers also need to offer financial wellness programs, as just over one-third of survey respondents indicate that financial stress is creating workforce challenges, she says. This is up more than 25% from the 2019 survey, she notes.
The survey also found that there is a 53% increase in the number of committees reviewing target-date fund (TDF) suitability.
“Now that it is the de facto QDIA [qualified default investment alternative], sponsors need to take a harder look at the glide path and expenses to make sure their TDF is the right fit for their plan’s demographics,” she says.
Finally, the survey found that, on average, those employers who assess the retirement readiness of their employees only do so every three years, Credico notes. Willis Towers Watson says it believes this is a critical assessment that all employers should be doing every year, Credico says.
For those groups that are not on a solid retirement readiness track, sponsors can adopt automatic features, educate participants about the importance of saving more and supply participants with information on diversification, Credico says. There are many tools at sponsors’ disposal, most of which don’t cost them any money, she says.
“Providing employees with a financially secure retirement goes beyond enrolling them in a DC plan,” says Alexa Nerdrum, managing director or retirement at Willis Towers Watson. “Employers [must] understand the support a robust DC plan can bring during employees’ working years and in retirement.”
Interest in lifetime income in retirement among DC sponsors has increased fourfold since 2017, although Credico notes it is still at low levels. The survey found that 16% of sponsors currently offer in-plan lifetime income options, and 15% are either going to be introducing them in 2021 or are considering them. Six percent offer out-of-plan lifetime income options, and 9% are either going to be introducing these in 2021 or are considering doing so.
The survey also found that 33% of sponsors identify cyber risk as their fastest-growing area of concern. Eighty percent of fiduciaries are spending an increasing amount of time and energy managing fees. And nearly three out of four sponsors have done a fee benchmark study in the past three years.
The utilization of 3(38) fiduciaries has increased more than two times in the past three years.
Plan design changes that sponsors are either extremely or very interested in adding include Roth options (19%), student loan repayment programs (19%) and allowing employees to choose from a variety of benefits, including DC contributions (12%).
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