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Retirement Income Selection Remains a ‘Pain Point’ for Many DC Plans

Industry Trends and Research

While the dedicated retirement income solution market has proliferated over the past several years, many plan sponsors have struggled to evaluate their options strategically, according to NEPC’s 17th annual Defined Contribution (DC) Plan Trends and Fee Survey.

This year’s data reveals that retirement income solutions are more prevalent than what is typically discussed, with 84% of respondents currently offering their participants one — most often in the form of a target date fund (TDF) that includes the flexibility to take installment withdrawals as a source of income in retirement.

That said, many are also struggling to evaluate their options due to a lack of consistency or industry consensus on how to create meaningful retirement income solutions — especially in regard to pooled employer plans, the firm notes.

“As participants continue to demand retirement income solutions, plan sponsors are seeking trusted stewards to help them simplify what’s become a pretty complex evaluation and selection process,” notes Alison Lonstein, Principal and Senior Consultant on NEPC’s Defined Contribution team.

“This trend mirrors what we’ve seen in other segments of the retirement space — especially the increasingly complex ESG and legal environments. We’ve seen a significant uptick in clients asking for fiduciary training on the ESG landscape and requests for more insight and intel around legal news,” she adds.

One caveat in applying the survey findings across the board is that the respondents are more skewed to larger plans. Respondents to the 2022 survey, which examines current plan investment trends, features and innovations across major sectors, included 207 DC plans across 119 clients representing $283 billion in aggregate assets and 2.2 million plan participants. The average plan size was $1.9 billion in assets among 13,452 participants, while the median plan size was nearly $806 million in assets among 4,506 participants.  

TDF Scrutiny

Meanwhile, the survey also shows the continued reach of TDFs in investment menus. Currently, 96% of respondents offer TDFs — unchanged from 2020 — with 46% of total plan assets invested in TDFs, compared to 42% in 2020. While TDFs remain a popular option, NEPC notes that plan sponsors are increasingly seeking guidance from investment consultants to help them better navigate rising scrutiny around these funds.

“Off-the-shelf and custom TDFs can have wide-ranging risk allocations, expenses, and best practices for management and reporting — something recent regulation and court cases are looking to address,” observes Bill Ryan, Partner and Head of Defined Contribution Solutions. “As we’re likely to see continued focus on America’s retirement crisis in the years ahead, plan sponsors should be having hard conversations today about their fiduciary decision making and monitoring process for TDFs on their menu,” he adds.

Additional findings from NEPC’s survey include the following:

Increased adoption of passive tier options: The firm’s 2022 data shows that 83% of plans currently offer a passive tier (three or more index funds), which is an increase from 66% in 2020.

Plans are being pinched, raising more interest in OCIO structures: As plan sponsors’ workforces and governance structures change, they are increasingly looking for OCIO solutions to streamline their plans. In 2021, NEPC saw a 94% increase in OCIO assets, driven by a 17% increase in OCIO DC clients.

Adoption of managed accounts has remained stagnant for the last four years: The firm’s data shows that 38% of plans offer managed accounts, but only 5% of participants are utilizing managed accounts and only 4% of assets are invested with managed accounts. NEPC also observes that fees are becoming more negotiable and some providers are offering asset-based fees with a hard dollar cap per participant.

Most plans incorporating ESG factors: Here, NEPC found that more than 79% of DC plans have integrated ESG factors as part of their investment process, but only 17% of DC assets are invested. Screening in/out certain securities for non-financial reasons was much lower, with only 6.2% of plans utilizing screening.