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How Do DC Plan Sponsors View Retirement Risks and Objectives?

A recent survey of DC plan sponsors and consultants finds that when selecting a target-date strategy or other QDIA, plan sponsors were most concerned about participants’ longevity risk and their ability to achieve higher retirement account balances over the long term.

T. Rowe Price’s survey, “Advancing the Way We Think about Retirement Risk and Outcomes,” found that when it comes to the selection process for QDIAs, DC plan sponsors largely prioritize risks in a manner consistent with long-term objectives. Even so, the study notes, there is greater reported sensitivity to short-term considerations among a minority of DC plan sponsors — which may be at odds with helping participants improve their long-term retirement outcomes.

The survey sought to gain a deeper understanding of plan sponsor’s perception of risk by posing three primary questions:

  • Interpret: How do DC plan sponsors perceive and prioritize the risks that participants face when working toward achieving their retirement objectives?

  • Translate: To what extent is the QDIA selection and evaluation process influenced by their perceptions and prioritizations of these risks?

  • Align: Are their perceptions of risks logically aligned with the stated long-term objectives for their participants?

Longevity Focus

Participants running out of money in retirement was found to be the top concern of DC plan sponsors, as 42% identified longevity risk as the topic of most concern — three times the number who prioritized concerns of addressing downside risk (14%) or volatility risk (12%).

In addition, only 35% of plan sponsors indicated that reducing point-in-time downside return is the most influential consideration when selecting a QDIA. In contrast, the study notes that nearly two-thirds (65%) of plan sponsors agreed that achieving the highest retirement income opportunity is a more influential priority in their QDIA evaluation process.

Risk Tradeoffs

The study explains that concerns about adverse sequence of returns (SoR) risk is sometimes cited as a factor favoring lower equity target-date allocations as a means of mitigating point-in-time downside risk and volatility. However, the survey findings suggest that plan sponsors are considering risk in a broader context, including the potential that a lower equity target-date glidepath “may fail to provide sufficient growth needed for participants to accumulate adequate savings for retirement.”

According to the findings, the majority of plan sponsors acknowledge that reducing near-term risk comes at a tradeoff, with 64% of respondents disagreeing with the statement, “There are no unintended consequences in attempting to mitigate sequence of return risk for participants.”

The study suggests that most sponsors recognize that efforts to mitigate SoR risk through asset allocation (e.g., by selecting a target-date strategy with a lower equity glidepath) could have unintended consequences, including a lower account balance entering retirement and a potential reduction of retirement income.

According to the authors, the survey results show broad awareness that attempts to prioritize managing volatility and downside risk on behalf of participants — due, in part, to heightened concerns about adverse sequence of returns — may come with tradeoffs that can ultimately erode retirement outcomes.

“We often see plan decisions that overemphasize point-in-time metrics, focus on a specific subset of participants, or anchor to a worst-case scenario,” explains Wyatt Lee, co-portfolio Manager, T. Rowe Price Retirement Date Strategies. “The intent may be to identify the right solution for a heterogeneous DC plan population, but it’s really important to keep the full population top of mind and to maintain a long-term view to help participants achieve the retirement outcomes they are hoping for.”

The authors emphasize that in the end — and possibly contrary to expectations — the increasingly long-term view required to accommodate participants through their careers and potentially into retirement is consistent with a focus on preserving growth potential over time, rather than preoccupation with short-term volatility or potential downside risk.

The online survey was conducted Jan. 29 to Feb. 20, 2018, by Signet Research, with a total of 337 responses received from 266 plan sponsor officials, 45 plan consultants, 3 financial advisors and 23 other individuals active in the DC plan market.