The “2021 Defined Contribution Consultant Research Study” gives insight into environmental, social and governance adoption, support for the continued evolution of target-date investments and retirement income solutions and the growing interest in financial wellness programs in light of the COVID-19 pandemic.
Traditionally, defined contribution plans were built to help workers accumulate retirement assets. Qualified default investment alternatives have played a central role in meeting this objective since the emergence of automatic enrollment, the study says. QDIAs that are used to help save for retirement and retirement income solutions for living in retirement may be conceptually linked.
More participants are remaining in their DC plans for longer after they retire, and many plan sponsors are looking for ways to address their needs, the study says. Lower costs for investments compared to a rollover IRA, flexibility in drawing down assets and investment solutions that generate income were all cited as features that may best persuade more participants to stay in plan after they retire.
Consultants rated simple systematic withdrawal capabilities as the best way to deliver retirement income from DC plans, despite limitations. Multi-asset investment solutions—managed accounts with income-planning features and target-date investments with embedded managed payout features—followed closely behind in rated appeal.
The study found that consultants strongly support increasing their focus on collective investment trust-based target-date solutions and pursuing blend solutions that may deliver the benefits of active and passive investment management. Consultants voiced less support for the use of managed accounts as QDIAs and mild support for adding or increasing allocations to diversifying asset classes such as private equity, real estate or Treasury inflation-protected securities.
When it comes to managed accounts, consultants cited a greater need for participant engagement and difficulty in getting information on other participant assets as key factors that have stood in the way of greater adoption of QDIAs, the study says.
Despite the growing pressure on fees, consultants and advisers believe DC plans should offer investment options across all asset classes that are either actively managed or a combination of both active and passive management, the study says. Interest rate and inflation concerns coupled with more retiree plan assets are influencing the evaluation of fixed-income and capital preservation investment options. Interest in ESG factors is being motivated by the desire to drive positive engagement among participants and better align with corporate sustainability targets.
Consultants tended to recommend stable value ahead of money market strategies, the survey says. While they reported that stable value is used by more of their clients, 31% of clients still use government money market investments.
Regarding ESG, consultants recommended active investment management over passive investment management or providing access through self-directed brokerage windows, the study says. They shared that plan sponsors are monitoring Department of Labor progress with ESG guidance and are considering current plan offerings before implementing.
Consultants are also seeing plan sponsors evaluate investment managers’ diversity, equity and inclusion baseline reports to satisfy basic due diligence, the study says. Further integration of DE&I information into plan and investment decisions may require more evolution.
In response to the pandemic and the “Great Resignation,” employers are more aware of the need for financial wellness programs, the study says. Employers’ key financial wellness objectives are to improve worker satisfaction and retention and reduce financial stress, which are also reported as the most measurable. Consultants largely believe that the pandemic has increased the relative importance of both emergency savings and debt management.
The study found that the majority of consulting and advisory firms reported that at least a quarter of their clients offer health savings accounts. Student debt and emergency savings programs are offered by far fewer plan sponsors.
Consultants and advisers broadly offer evaluation of recordkeeper-provided financial wellness solutions, while just over half evaluate third-party wellness solutions, the study says. And while most consultants currently evaluate recordkeeper-provided and third-party financial wellness solutions, a smaller number also provide proprietary financial wellness solutions for their clients.