DC Plan Sponsors – Five Focal Points – a Q&A

DC Plan Sponsors

DC Plan Sponsors – Five Focal Points – Questions & Answers. PGIM, the Investment Management Business of Prudential Financial, just released a new white paper authored by Head of Institutional Defined Contribution Josh Cohen, CFA. Josh is a well-known DC industry thought leader, and in his usual fashion, offers insights and new perspectives on how plan design, investment, and regulatory innovations can positively impact participant outcomes.

The paper provides much food for thought for plan sponsors. Essentially, it examines what issues have been answered and what questions remain in five key areas: plan design, public policy, investments, default options, and post-retirement. The paper is well worth a read, however, we’ve created a “CliffsNotes” version for you. Rather than try to paraphrase Josh’s eloquent prose, here are some key highlights from each of the five areas he covers, in his own words:

Plan Design

What’s been answered? “Sponsors should be thinking more strategically about what the right default-driven design is needed to get participants to reach their goals. In our experience, leading plan sponsors are setting a retirement readiness objective for their plans, determining what savings rates combined with employer contributions will get them there, and designing plan features in a way to support meeting these objectives.”

What questions remain? “Many sponsors are looking to take a more holistic approach to employee financial wellness, including areas such as budgeting and debt management. The belief is that it is not only good for the employees but also benefits the employer as well when their workforce is less financially stressed and more retirement ready… The question remains how far employers will go in bringing more holistic financial solutions to their current employees and retirees.”

Legislation, Regulation, and Litigation

What’s been answered? “Perceived fiduciary concerns should not dictate that DC plans only offer participants the lowest cost options. Doing so could potentially put participants at risk of failing to meet their goals, arguably creating more legal risk by violating one’s fiduciary duty… However, fiduciary obligations require sponsors to do what is in the best interest for participants, and not simply offer basic, passive investment options. Fees are critical but ERISA requires that costs be ‘reasonable,’ and not necessarily the lowest.”

What questions remain? “Although the 2017 Tax Cuts and Jobs Act does not… [implement] “Rothification” of contributions, how long until Washington looks for other opportunities to tap the retirement system… to fill a budget hole? … Roth contributions have… been primarily offered on a voluntary basis… Plan sponsors should continue to be aware of these issues and use their voice to remind public policy makers of the importance of tax-advantaged savings to increase retirement readiness.”

Investments 

What’s been answered? “Menus should offer more streamlined options while also expanding investment coverage to diversifying asset classes and strategies… Both participation rates and decision-making improve in plans with consolidated investment menus… The inclusion of diversifying asset classes… can have multiple benefits, most notably providing participants the opportunity to enhance risk-adjusted performance and protect from risks…”

What questions remain? “High-level questions include: What is the right number of options? Which asset classes should be offered? How do plan sponsors integrate active and passive managers? How do sponsors determine what type of vehicle to select? …Ultimately, there are no single correct answers as preferences and sponsor resources matter significantly.”

The Default Option

What’s been answered? “Sponsors should ensure their QDIA is designed explicitly… to provide better retirement outcomes… decisions regarding [QDIA] design should be based on how well they help participants meet their liabilities and manage key risks… Regardless of the type of QDIA that is selected (e.g., off-the-shelf or custom target-date funds, or managed accounts), sponsors should seek these characteristics in a solution as it will have the greatest impact on outcomes.”

What questions remain? “Can outcomes be improved even more through greater customization of the QDIA either at the plan (target-date) or individual (managed account) level? …While most industry experts agree that more individually-tailored solutions should increase the probability of meeting retirement goals, there will likely need to be an evolution in how sponsors are able to deliver these options in a cost-effective way, including hybrid solutions that combine target-date funds and managed accounts. Plan sponsors should periodically evaluate available options and implement ones that work best for their plan.”

Post-Retirement

What’s been answered? “In retirement, DC plan participants will need help in managing to a unique variety of risks, notably market, inflation, and longevity risks… Insurance-related solutions can be of significant help. These products have the ability to pool mortality risk, reduce market volatility, and protect against inflation, but come with unique complexities that need to be carefully considered.”

What questions remain? “How will plan sponsors offer solutions within a DC plan to manage unique retiree risks? Sponsors should help participants solve these challenges… While the process can be overwhelming, sponsors and their advisors should determine the appropriateness of various solutions… The reality is that there is likely not a single one-size-fits-all solution… A good first step sponsors can take is communicating to participants in terms of projected future retirement income, away from the focus on account balances.”

What should DC plan sponsors do with all of this information? To be sure, sponsors must be willing to explore new courses of action to help improve participant outcomes, and, in Josh’s words be “committed to implementing these solutions and discovering what next set of steps can move the needle even further.”

Robyn Kurdek

Robyn Kurdek

Freelance writer with nearly 2 decades of financial industry experience, with niche expertise in the defined contribution (DC) industry. I also have defined benefit (DB) plan knowledge. I write all types of content for retirement plan participants, sponsors and advisors, including web copy, newsletters, white papers, fact sheets, blog posts, financial wellness articles, and more. "I speak DC."
Robyn Kurdek
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