Fifty-five percent of plan sponsors funded a match in 2014,
up from 52% in the previous year, according to Ascensus’ analysis of the retirement plans it serves.
In addition, 18% of plans automatically enrolled participants in 2014, up from
15% in 2013. Assets in model portfolios and target-date funds (TDFs) have surged from
17% of all plan assets in 2011 to 26% in 2014.
Citing data from Morningstar, Ascensus said that 80% of employees who were
automatically enrolled into a managed account remained invested in the fund two
years later, and 86% of employees invested in managed accounts were properly
diversified according to their age and risk tolerance.
Eighty-five percent of new enrollees sign up for their retirement plan online,
signaling a clear shift to digital, Ascensus said. Retirement calculators can
also be very helpful for participants; nearly 18% of those who used a
calculator increased their savings rate after using it, and 37% of employees
who were not participating in their retirement plan joined it after using the
calculator. (See “Your Clients Auto-Enroll, Now What?”)
“We continue to see the emergence of new approaches and tools in the retirement
space, leading to increased participation, but the ultimate goal remains to
improve retirement readiness among savers,” says Gene Cufone, senior vice
president of retirement administration at Ascensus. “Ascensus’ objective is to
help people save for the future, and the current trends are supporting that
collective goal. Automatic features, expanded employer match programs and
guided approaches from plan advisers will remain a differentiator for aspiring
retirees.”
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Asked their top three retirement plan issues, 49% of sponsors first cite complying with regulations,
followed by reducing plan costs (47%), and reevaluating the investment menu
(45%), according to a new report from Cogent, “Navigating Change in the 401(k)
Market: Key Insights for DC Plan Providers and Investment Managers.”
“In what may be a warning for incumbent providers, one quarter (25%) of plan
sponsors intend to reevaluate their plan provider in the next 12 months, up
from 18% in 2014,” Cogent said.
Fully half (50%) of plan sponsors intend to make some kind
of change to their investment menu in the next 12 months, and 35% expect to
change the mix of plan investments.
In terms of how the fee disclosures have impacted plan
sponsors’ relationships with their providers, 55% say they will maintain the
fee arrangement they have with their current plan provider. However, 22% plan
to request fee reductions, 14% intend to change bundled fees to direct fees,
and 13% plan to issue a new request for proposal (RFP) for recordkeeping
services.
As to how the fee disclosures have impacted sponsors’ treatment of investments,
31% are now benchmarking the plan investment fees on a regular basis, 25% are
negotiating lower fees for existing investment options, 12% have changed some
or all funds to lower-fee share classes, 12% have either reduced or eliminated
revenue-sharing arrangements, 10% have consolidated the plan investment menu,
9% have considered a multi-manager options, and 5% have mulled a collective
trust.
NEXT: Plans to switch
plan providers
Perhaps most surprisingly, Cogent says, 75% of plan providers
say they are at least somewhat likely to initiate a formal review of their
401(k) plan over the next 12 months. Among this subgroup, 15% say a switch in
providers is highly likely, and 50% say it is somewhat likely. Thirty-six
percent are certain they will not initiate a change in providers in the coming
year.
All plan sponsors are regularly evaluating their providers, with annual reviews
the most common. When they evaluate their providers, the top five factors they
look at are: quality of investment options (cited by 55%), plan administration
fees (48%), range of investment options (48%), overall service quality for
participants (46%) and plan investment fees (43%).
“Notably, the criterion of plan design features is identified by 37% of plan
sponsors this year, up from 30% in 2014, suggesting that plan sponsors may be
looking for a greater level of support from their providers in optimizing the
design of their plans,” Cogent said.
Asked why they are likely to review or switch providers, the top reason
sponsors cited was plan administration fees (41%), followed by quality of
investment options (33%), plan investment fees (33%), range of investment
options (30%) and overall service quality for participants (30%).
As to plan sponsors’ reasons for dropping or reducing investment
managers, the overwhelming cause is underperformance relative to benchmarks,
cited by 59%. Other factors include investment team turnover (27%), to seek
funds with lower fees (26%), organizational instability (13%), and poor
understanding of the sponsor’s goals and objectives (11%).
NEXT: Implications
for plan providers
No longer operating on auto pilot, changes within the 401(k)
industry are taking the forms of increased incidence of formal plan reviews and
intention to switch providers and modify investment lineups, Cogent said. “With
many taking counsel from an external consultant or financial adviser, plan
sponsors are clearly articulating what they want from a provider, so it is up
to firms offering 401(k) plans to follow through with a differentiated offering
that is competitively priced, provides high-quality choice in investment
options and supports strong fiduciary practices.”
In short, providers cannot afford to be complacent, Cogent
said. They need to defend their administration fees and participant service
quality, along with the quality and range of their investments, the research
firm said.
Cogent’s report is based on two separate surveys of 401(k)
plan sponsors, the first conducted in February and March, and the second
in March and April. Cogent’s full report can be viewed here.