457 plans, which are defined contribution (DC) plans, are much more than just a brother to the 401(k). These plans have very much their own designs, rules and implementation concerns. Recently, Charlie Ruffel, Founder and Director of PLANADVISER, discussed research findings about 457 plans and trends in 457 plan design and administration during a webcast with Eric H. Wietsma, FSA, MAAA, Senior Vice President, and Carl Steinhilber, CFS, National Government Practice Leader, both of MassMutual Retirement Services.
PA: Take us through what’s happening in the 457 space with regard to the multiple vendor scenario.
Wietsma: It’s very common, particularly on the smaller end of government, to have multiple vendors. Compared to the industry as a whole, government plans’ investments tend to be very conservative overall. Counting each vendor as a separate plan historically has been a way to provide choice to participants, which is a common theme in the government market, where sponsors have been very paternalistic and concerned about the diversity of participants that they have in their plans.
We are seeing a trend towards consolidation of vendors as products have improved and vendors have improved their offerings. Sponsors can provide participants with plenty of choice through a single plan offering and through a single vendor, so we expect to see this number of consolidations to continue over time.
In the government market, some trends work their way from the largest plans down the market. In the mega end of the government market, there is a reduction in the number of investment options. You’re also seeing a prevalence for single provider models. The small plan markets still present a great opportunity for advisers and consultants to help sponsors realize efficiencies using plan design.
I think sponsors at one point viewed their role as more hands-off. As long as they were offering choice in vendors, they were doing their job. Today, you see the multi-vendor scenario exist more in that small/mid part of the market, and that’s where we see that consolidation trend. The government market has always had good judgment and discipline around offering a manageable number of providers, so when we talk about multi-vendor in government, we literally mean two or three. It’s very rare to see more than that.
PA: Notwithstanding the general move towards consolidation, the number of investments in these plans is higher than the industry at large.
Wietsma: On average, the government plans have more investment options available for participants than the rest of the industry. A bit of that goes back to the theme of providing choice for a diverse population of participants, where sponsors have adopted new investment asset classes early on.
The other theme here is perhaps sponsors’ unwillingness to replace options. So, as options have grown out of favor, the knee-jerk reaction has been to add new options, which leads to the average number of investments increasing over time.
On the mega end there’s really no appreciable difference in the DC industry overall; in the small and mid-market area there is an opportunity for more consultation with sponsors.
Steinhilber: Along the same theme, many governmental plans are either continuing to build customized target-date series or already have one in place. By “customized” we mean that they create custom target-date funds (TDFs) made up of the existing investments in the line-up. Your adviser or consultant has already selected your fund menu, so why not use those funds to create your target-date series?
They get the asset-allocation model from a third party or from the adviser. But you can also take those custom strategies and line them up with lifestyle or investment styles like conservative, moderate or aggressive. So, you can end up with, for example, Series 2050 funds, but within the series a conservative, moderate or aggressive model. With these models, you’re really hitting every type of employee. We call it a custom choice program.
Wietsma: This government market, where DB has been so prevalent, has a strong focus on “set it and forget it,” so the target-date option has been very attractive.
Steinhilber: Mutual funds are obviously the prevalent investment in 457 plans. As plans get larger, they start to use things such as stable value funds and separate account stable value funds. Additionally, there is a higher use of commingled funds than in the industry as a whole, mainly driven by the stable value investment category. The government market has been a leader in finding different ways to help folks diversify their investments.
Wietsma: For the industry, the vast majority (85%) of plans across the market review their investments at least on an annual basis. On the governmental side, close to half do so on a quarterly basis. On the flip side of that, in the micro end of government, 20% responded that they never look at their investment options.