Speaking at the 2017 PLANSPONSOR
National Conference in Washington, D.C., two industry experts weighed in
on top trends affecting retirement plan administration. Daniel Bruns,
head of large defined contribution (DC) plan strategy and solutions for
Morningstar Investment Management Inc., and Drew Carrington, head of
institutional defined contribution – U.S. at Franklin Templeton
Institutional LLC, discussed topics ranging from a new take on
retirement income solutions, to the sizable impact that data analysis is
having on plan customization—and the rest of those below—all reflecting
current industry trends. The executives’ insights derive from their
work with retirement plans and the sponsors who run them.
Rethinking Retirement Income: The Inherent Appeal of a Distinct Retirement Income Tier. When
discussing the role of retirement income in today’s plans, Carrington
said, “I want to step back from retirement income having a single
solution. The problem is, that’s a unicorn that just does not exist.”
Instead,
Carrington noted, the concept of retirement income is broader than a
single investment option. “It’s a tool kit made available to
participants that includes friendly plan design, targeted communication
about over-age-50 catch-up contributions and a Social Security
optimizer, to name just a few.”
Making Income the Outcome – Trends in Developing Retirement Income Solutions. Bruns
noted an acceleration in developing income solutions over the past
year. “As an industry, we’ve given participants the chance to create
great assets. Now they need help on the second half—how to invest these
assets and how to take distributions.”
He pointed to three
distribution solutions: a “through,” or a “to,” target-date fund (TDF); a
managed payout fund, which has a set distribution schedule of usually
4% and can be expensive; or a managed account, which also can be
expensive.
The Oversimplification of Overchoice: The Call for Curation—Rather than Elimination—of Choice. Industry
experts have spoken for a long time about behaviors and participant
decisionmaking, but where is the role of choice in retirement plans
today? According to Carrington, “Automation has been great for the most
vulnerable population—the young. But overall, the defined contribution
(DC) industry tends to equate changes with expertise.
“We think
participants don’t have the expertise to make their own choices, but
maybe we’ve taken it too far,” he said. “Participants have preferences.
As they become more engaged with their plan—when they are older and
their assets have become more significant—limiting their choices can
become problematic; they may want more differentiated options.”
Core Menu Design in the Age of Default Investing. Bruns
had a different view than many in the industry regarding how many funds
should comprise a retirement plan lineup. He concurred with Carrington
that core menus need to be expanded. “There has been a lot of movement
on this trend,” he observed.
“Let’s re-examine the average
person. He is defaulted into an asset allocation that he stays in until
he leaves. [Average people] represent 80% of the participant population.
But the other 20% want to do it themselves. They’ve been with the plan
longer; they have more assets and are savvy investors. Diversification
is important and is the only free lunch in the industry.”
NEXT: Working beyond prepackaged TDFs
Working Beyond Prepackaged TDFs. As
is well-known in the industry, target-date funds (TDFs) have gathered huge amounts of
assets in the industry. Carrington feels that the funds have been a
great tool, offering diversification for new employees. Still, he said,
“DC investments have become more customized and defined-benefit
[DB]-like but not in a standalone format—these custom funds have now
been incorporated into the TDF.”
He continued, “We can go astray.
By the time a participant gets to ages 50 and 60, his rate of equity
may be too high. Picking one TDF can’t be right for all participants; it
should vary according to the context of that person, overall.”
Balancing Cost and Personalization in Selecting Appropriate QDIAs. Morningstar
has plans in a variety of sizes, and, Bruns said, the plan sponsors
often find QDIA selection a struggle. “The choice has to be right for
the specific plan. When asked if we can help, we start with three
primary questions: Does the plan sponsor have something that’s different
than an average U.S. plan such as a company stock or a DB plan? Does
the plan sponsor value personalization? Is the plan sponsor looking for
participant advice?”
Morningstar has developed a process of
analysing demographic information to help make a decision on the right
QDIA, Bruns said. “What existed five years ago, in terms of pricing and
service, is in no way indicative of the current market.” He suggests
re-evaluating QDIA options every two years.
Targeted Communications and Resources to Aid the Retirement Transition. Carrington
noted that, in order for plan sponsors to reach out to participants in
the most effective way, they need to look hard at the targeted
demographics. For instance, he said, “Currently, job tenures for younger
and older participants are about four or five years. With that said,
for new employees to be auto[matically] enrolled at 6% when, in their
previous job, their deferral had perhaps already increased to 10%, does
not make sense. Invite them to save as they were.” This is one example
of a targeted group, he said.
Another example would be those
turning 50, whom the sponsor could target to consider catch-up
contributions, Carrington said. That milestone birthday can become a
trigger point to remind them that they have the opportunity to save
more for retirement. “This kind of targeted message drives behavior. We
may think they are not engaged, but targeted messaging shows otherwise.
Do not generalize based on averages,” Carrington said.
Using “Big Data” to Improve Plan Analysis. The
push to use data is coming from service providers, and it has already
transformed the industry, according to Bruns. “In the past, industry
professionals would struggle to get four data points on a participant.
If you fast-forward to today, we can get 12 points, and that allows us
to better understand how they are tracking and then how they move the
needle,” he said.
He believes that, in the future, providers will
begin to share data points about individuals. “Currently, this
information is not shared willingly,” he said. However, he thought it
was just a matter of time before, just as the health industry shares
data, retirement service providers will join the data revolution.
Working With Recordkeeping Partners. Morningstar,
which works with 27 recordkeepers, has seen them evolve and become
increasingly innovative, adding new products, dynamic QDIAs and mobile
applications, all of which bring value to participants, Bruns said.
“They are also adding widgets, which help engage younger participants.
Recordkeepers are really investing in their space, so we expect to see
many new features in the next couple of years.”