Emerging and Growing Trends in DC Plans

A survey from Towers Watson reveals some emerging and growing trends in defined contribution plan design, investments, fees and communications.

More employers are offering participants the opportunity to save on an after-tax basis, according to the Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey. Fifty-four percent of companies offer Roth features in their 401(k) or 403(b) plans, up from 46% in 2012. Additionally, 18% of respondents are planning or considering adding Roth features by 2016. Of those that currently offer Roth, 45% also allow other after-tax contributions.

Changes to health savings account (HSA) and defined contribution (DC) plan contribution levels are an emerging trend, Towers Watson says. Twenty-three percent of employers that offer DC and HSA plans intend to increase their total contributions toward these plans over the next two to three years.

However, there is room for improvement in integrating HSA and DC contributions, which offers employees tax efficiency, according to the firm. Nearly every company (99%) sets DC and HSA contributions independently. Of those that offer HSAs, only one in five (19%) specifically educate their workers about the wealth accumulation benefits of saving in both plans.

The survey results show the evolution of investment offerings has come full circle since the inception of DC plans. The first plans generally offered a few diversified choices, but over time, many organizations offered an overwhelming number of options. Today, employers are streamlining the number of investment options they offer to employees.

More than two in five (43%) companies have streamlined their investment offerings in the last five years with a strong bias toward continuing to decrease options in the next 12 months. Three-quarters (74%) of plans currently maintain fewer than 20 options, with the majority offering between 10 and 19 investment choices.

The vast majority of companies (79%) offer a combination of active and passive options throughout their portfolios. Approximately one in 10 offer either active-only or passive-only choices. Towers Watson says the understanding that active management efficiency is better achieved through multi-manager structures is growing. Participant use of single, stand-alone options has been inefficient, and 40% of companies recognize that combining investment strategies is more effective.

One emerging trend for investment lineups is custom target-date funds (TDFs). Unbundling the key decision points enables employers to align the glide path, portfolio construction and fund implementation to their plan objectives and participant demographics. Half of companies (49%) say they see the value of a custom TDF series and either have implemented one or may explore the option.

The survey finds outsourcing of investment services is gaining traction. One-third of respondents are either already in an outsourced DC solution or have expressed interest in delegating all or a portion of their plan oversight, with smaller plans more interested in outsourcing than their larger counterparts.

Regarding fees, 40% of survey respondents calculate and charge an asset-based fee based on the performance of the investment funds, while 32% charge a fixed dollar amount per member. Fifteen percent have a mix, where some recordkeeping fees are calculated as a fixed dollar amount per member and the remainder is charged as an asset-based fee netted from the performance of funds.

Towers Watson finds that since 2009, the percentage of companies requiring employees to pay direct recordkeeping fees has risen from 33% in 2009 to nearly 60% passing the full cost on to participants today. Only 23% of employers absorb the cost themselves.

The firm notes that increased use of technology opens the door for new ways to build participant engagement and increase the likelihood they will take action. However, using technology without a strategy for implementation, measuring results and refining the process does not guarantee it will result in participant engagement and behavior change. To increase the likelihood of effectiveness, Towers Watson suggests plan sponsors’ communication strategies should be based on data that provide a thorough understanding of all participants and what motivates their behavior.

One approach the firm says employers are using to gain knowledge of their participants and design communication campaigns is micro-segmentation, which leverages data to identify communication preferences, buying habits and other behavioral tendencies. Data can also be used to deliver content that is timelier and more relevant, reaching employees when they are most likely to act, such as after a life event or transition to a different life stage.

Armed with this knowledge, employers are able to use the right technology in more targeted ways to reach participants more effectively, such as through gamification, online contests and questionnaires, mobile apps and electronic bulletin boards. According to Towers Watson, when used strategically, the increased accessibility and low cost of mobile apps, gamification methods and other technology solutions offer plan sponsors new ways to reach employees and more alternatives for helping them make better, more informed financial decisions.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets.

The survey report may be downloaded from here.