Data & Research December 20, 2016

Commitment to DC Plans Remained Strong in 2016

Both employers and employees remained committed to funding defined contribution plans during the year, which saw significant market swings and bouts of uncertainty. 
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A new report from BrightScope and the Investment Company Institute (ICI) finds the great majority of employers that sponsor 401(k) plans—more than three-quarters—contribute to their plans to promote employee financial wellness.

The in-depth study, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2014,” shows employers use a range of formulas when they provide matching contributions. It also reveals that plan sponsors offer a wide variety of investment choices and that mutual fund fees in 401(k) plans have trended down.

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Data from the study was drawn from the Department of Labor (DOL) on a wide range of private-sector 401(k) plans, with additional detailed investment data drawn from the BrightScope Defined Contribution Plan Database, which covers nearly 30,000 large 401(k) plans.

“The study underscores how the 401(k) plan’s flexible structure permits employers to configure their own plan designs to encourage employee participation and meet the needs of their workforces,” observes Sarah Holden, ICI’s senior director of retirement and investor research and a researcher on the study. “As the 401(k) market evolves, plan sponsors revisit and refine their plan designs and remain committed to promoting retirement saving, offering a wide range of investment choices, and often making contributions to the plans.”

Looking across the universe of 401(k) plans, the analysis finds that employers contributed about one-third, or $115 billion, of total 401(k) plan dollars invested in 2014. In nearly all (95%) of the large plans with 5,000 participants or more, the employer contributed in 2014, while more than three-quarters of small 401(k) plans with fewer than 100 participants featured employer contributions.

NEXT: Additional findings highlight sponsor shifts 

“Focusing on a sample of large 401(k) plans reveals that in 25% of 401(k) plans in the BrightScope database, employers contributed to the plan without regard to how much the employee contributed,” the study shows. “Simple matching formulas are the most common type of employer contribution—found in 45% of 401(k) plans in the BrightScope database.”

Under simple matching formulas, an employer matches an employee contribution up to a fixed percentage of the employee’s salary (for example, 50 cents on the dollar on employee contributions up to 6% of pay). Another 14% of 401(k) plans in the BrightScope database had a tiered formula, with employers matching different levels of employee contributions at different rates, and 2% of employers matched up to a maximum dollar amount.

Among the most positive findings, researchers observe that nearly all (97%) of the sample of more than 50,000 large 401(k) plans with 100 participants or more and at least $1 million in plan assets included at least one of the three activities considered crucial to plan success by many observers—automatic enrollment, employer contributions, and carefully controlled participant loans. Twenty-one percent of the 401(k) plans in the sample reported evidence of all three activities.

“Larger plans were more likely to have all three activities in their plans,” researchers suggest. “The most prevalent combination of plan activities was employer contributions in plans that also had participant loans outstanding—observed in 47% of 401(k) plans in the sample.”

NEXT: Fund fees trending down 

Based on the data from the BrightScope database, the study found that mutual fund fees in 401(k) plans trended downward between 2009 and 2014. The study also found that fund expenses are typically lower in larger plans.

“For instance, the average asset-weighted expense ratio for domestic equity mutual funds was 82 basis points for 401(k) plans with $1 million to $10 million in plan assets, compared with 39 basis points for 401(k) plans holding more than $1 billion in plan assets,” researchers observe.

Brooks Herman, head of data and research at BrightScope, a unit of Strategic Insight, further observes that fees in 401(k) plans continue to trend downward over time, due in large part to increased transparency in the form of public disclosure that have allowed plan participants and plan sponsors to better judge the impact of fees on 401(k) savings.

As in years past, other key findings show mutual funds were the most common 401(k) investment vehicle, holding 46% of 401(k) plan assets in the sample in 2014. Collective investment trusts (CITs) held 26% of plan assets; guaranteed investment contracts (GICs) held 9%; separate accounts held 4%; and the remaining 16% was invested in individual stocks, bonds, brokerage, and other investments. In the qualified default investment alternative (QDIA) slot, target-date funds (TDFs) are still supreme; 76% of 401(k) plans in the sample offered target-date funds, compared with 32% in 2006. During the same period, the share of participants who were offered target-date funds rose from 42% to 77%.

The research further shows the offering of index funds rose from 79% to 89% from 2006 to 2014, and the percentage of plan assets invested in index funds rose from 17% to 29% during that period.

The full report is available for download here. 

Client Service December 20, 2016

Competition Drives DC Plan Provider Digital Innovation

An increased focus on employee retirement readiness and financial wellness is being supported by a proliferation of responsive website design.
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The world is undergoing a digital transformation, and everything is going digital now, including personal financial management and commerce, says TIAA’s Chief Digital Officer and CIO, Scott Blandford, who is based in Iselin, New Jersey. And, the same is true for employer-sponsored retirement plan data and communications.

The digital transformation has moved more slowly with plan providers, but it is inevitable that it will be required, Blandford tells PLANADVISER.

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Corporate Insight Senior Retirement Analyst Andrew Way, in New York City, says, “It is important for [plan providers] to get on board because of the way industry is going right now. There are two segments of plan sponsors regarding retirement planning—one says ‘let us do all work,’ but a large and growing segment is taking the approach that they want employees to engage with the plan and realize how important it is to save and how it is on them now to save.”

One way to help people do that, Way tells PLANADVISER, is to provide a modern online experience, where they can see their account data, where it is going in the future, how to allocate investments properly and the importance of saving often and more. He says retirement readiness and income projection tools on websites are growing and popular. “It is important to provide participants with knowledge to take control.”

Corporate Insight follows the digital offerings of 20 retirement plan providers—19 of which are the largest providers according to assets under management (AUM) in the PLANSPONSOR Recordkeeping Survey. Four key trends Corporate Insight is seeing among the 20 retirement plan providers it tracks include:

  • Increased focus on employee retirement readiness and financial wellness;
  • Proliferation of responsive design;
  • Emergence of comprehensive mobile and tablet apps; and
  • More personalized approach to retirement planning.

According to Blandford, TIAA also offers Plan Focus, a product for plan sponsors. “We recognize that offering features and functions isn’t going to be enough, plan sponsors expect coordination of the digital tools they use,” he says. “We think sponsors will want to position plans and providers carefully, manage features of the plan directly through the portal, offer text messaging alerts, and get real time updates on key processes, reports, etc.”

TIAA has seen a 200% increase in administrator web property; it has transformed more than 100 formerly paper forms to a digital experience, and there is a 73% increase in use of some key features on the administrator website. “It helps them with adoption and utilization. They don’t need training because they know how other digital tools work,” Blandford adds. “Plan sponsors are under time and budget pressure, our digital tools save them time. They will have more time to do other things they do for their business.”

NEXT: Increase in retirement plan providers’ digital offerings

Among the 20 retirement plan providers that Corporate Insight follows, all offer calculators or interactive planning tools on their websites, five offer a retirement income tool on a mobile app, three offer it on a tablet app and nine offer an optimized mobile website.

According to Corporate Insight’s survey, Satisfying Today’s Retirement Plan Participant, over the course of the past year, 12 firms have made meaningful additions or improvements to their retirement readiness tools. Eight of them, for example, added retirement readiness figures directly to homepages.

The demand for retirement income projections is clearly demonstrated by the survey data, in which Corporate Insight polled approximately 1,500 defined contribution (DC) plan participants on a myriad of digital-related retirement plan topics. Roughly 63% of all respondents answered that a retirement income projection is a feature that is either extremely important or very important to include on the participant site, and a full tool whose results include this projection was deemed extremely or very important by 65%.

A recent trend is offering tools that allow participants to input external financial information for accurate projections. But most participants didn’t want to take the time to provide inputs, Way says, so some plan providers are using an automatic import feature, in which they scrape data from their site and use that in income projections, but they also offer the ability for participants to make modifications to get a more in-depth picture. These tools make specific recommendations, such as save 2% more of salary for 90% income replacement.

Way says there has also been a proliferation of responsive design. Using the same URL, participants can log in from a phone, tablet or desktop computer, and the tool is optimized regardless of screen size. Six of the seven most recent firms to overhaul their websites have introduced this.

In addition, contribution rate management is offered by 10 firms from a mobile website, including responsive or traditional sites. Contribution rate management from a tablet is offered by six firms, and contribution rate management from a phone app is offered by 10. Providers are also offering rebalances, simple fund exchanges, contribution rate changes and requests for withdrawals or rollovers.

NEXT: Offerings versus usage

Way notes that while Corporate Insight survey data shows individuals deem retirement income tools as important, many do not take advantage of their availability; only 24% of all respondents stated they viewed their retirement readiness rating or chart in the previous 12 months, and only 23% used a retirement planning tool. Just 34% of participants are very satisfied with their provider’s website.

The gap in demand and usage could be explained by participants not being aware of what is available to them for free online on their provider site, Way says. For example, in Corporate Insight’s annual Retirement Plan Monitor Awards report, Fidelity got a gold medal for online resources, but many Fidelity participants didn’t know what’s available for free. “Employers and recordkeepers need to do a better job of communicating what resources are available,” Way adds.

Meanwhile, TIAA is seeing success, with a 200% growth in use by participants of its mobile app by participants, as it makes more transactions available.

“We’ve done a couple of things to get more use. We realized a year ago that we needed to look at web and mobile not as tech projects but as online stores,” Blandford says. “We see what customers are doing, what they can’t find and making changes that day. Another thing is keeping language really simple.”

According to Blandford, on its landing page, TIAA makes tools get simple, clear billing and are easy to find. TIAA also offers outbound messaging—sending an email or text to participants that it is a great time to do a checkup.

Blandford also notes that certain digital features are popular across age groups—basic things such as “see how I’m doing” compared with people my age—but older generations are more concerned about retirement planning and how to take income. “Popularity of digital transactions depend on participants’ journey in their life,” he says.

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