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Study: Hands-off Approach to DC Plan Design May Undercut Goals

Industry Trends and Research

Most DC plan sponsors feel a high level of responsibility for participants’ financial wellness, but a new survey finds that many are not taking proactive measures to position them for success.  

J.P. Morgan Asset Management’s fourth biennial survey of U.S. defined contribution plan sponsors finds instead that when it comes to helping participants, plan sponsors with a proactive philosophy believe their plans are more effective in achieving goals than those who are hands-off. 

In this year's survey of 838 plan sponsors, 59% say they focus on participants making their own choices, while 41% believe in proactively placing participants on a strong saving and investment path. 

J.P. Morgan reveals in the resulting white paper, “The Power of Being Proactive,” that more than 70% of proactive-philosophy plan sponsors believe their plans are “extremely” or “very” effective in helping to ensure participants achieve a financially secure retirement, compared to only 47% of those with a hands-off philosophy. An equal percentage also believe their participants can retire at their targeted ages – more than 50% higher than plans with a hands-off philosophy. 

The study notes that how plan sponsors see their philosophical role naturally affects how they approach managing their plan. As such, proactive-philosophy plan sponsors are generally more likely to utilize industry best practices in terms of getting participants into the plan through automatic enrollment, helping them to contribute more through automatic contribution escalation, streamlining investment decisions and targeting communication efforts.

“It has been demonstrated that features such automatic enrollment and automatic contribution escalation can have a significant positive impact on participation rates and savings levels, and working with advisors and consultants, plan sponsors may wish to consider the best way to take advantage of these features,” notes Meghan Jacobson, Executive Director of J.P. Morgan Asset Management.

Automatic Features

This year’s research shows that 55% of plan sponsors now offer automatic enrollment, up 28% from J.P. Morgan’s first survey in 2013. But when looked at from a proactive philosophy versus hands-off one, 71% of those plan sponsors that consider themselves proactive offer automatic enrollment, compared to only 44% of those with a hands-off philosophy.  

Of the 55% of plan sponsors offering automatic enrollment:

  • 23% automatically enroll only new hires;
  • 20% automatically enroll new hires and have conducted a one-time sweep for employees not participating in the plan; and 
  • 11% automatically enroll new hires and periodically automatically enroll employees not participating in the plan. 

And while fewer plan sponsors (38%) offer automatic contribution escalation, this represents an 81% increase from the 21% of those using this type of plan feature in 2013. But again, when looked at through the prism of proactive versus hands-off, 58% of proactive sponsors offer auto-escalation, compared to only 24% of hands-off sponsors.  

The authors note that plan sponsors cited employee pushback and individual financial responsibility as key reasons not to offer automatic features, but they point to the firm’s 2018 DC Participant Survey showing that most participants are in fact in favor or at least neutral about these features.

Retirement Income Solutions

Many plan sponsors also see providing retirement income solutions to help with decumulation as a plan responsibility, according to the results. This year, the firm asked specifically about the role of retirement income in DC plans and found that 53% believe these plans should be vehicles for retirement income generation. 

Moreover, 54% believe that as plan sponsors, they have a level of responsibility to offer retirement income solutions to participants. Interestingly, only 38% of financial advisors outside of the plan believe that DC plans have a responsibility to offer retirement income solutions to participants. “Given the growing number of participants anticipated to soon start entering retirement based on demographic trends, we expect this to be an exciting area of development and will continue to evaluate it in future research,” the authors note.  

TDF Knowledge Gap

J.P. Morgan’s paper further emphasizes that while the broad adoption of TDFs has been a positive development, the findings suggest there is room for continuing education on the importance of clearly understanding and evaluating the TDF strategies plan sponsors select, especially when they are used as a QDIA. “Although most plan sponsors are confident in their strategy knowledge and selection process, a sizable number lack an acceptable level of basic awareness about how the TDFs they choose are constructed and the likely implications of what that might mean for potential retirement outcomes,” the paper states.  

The findings show that three out of four plan sponsors are highly confident regarding their TDF selection and monitoring process, but more than 30% of plan sponsors still do not have a solid understanding of the specifics used in their TDF designs.

Observing that many plan sponsors – especially smaller ones – appear to be either discounting a range of key evaluation criteria and over-relying on performance or fees, or simply choosing the strategy offered by their plan provider/recordkeeper to select their TDFs, J.P. Morgan notes that this is an area where using a “proactive advisor can be extremely useful.” 

In fact, the findings show that plan sponsors that work with advisors that proactively suggest new ideas and best practices are more likely to be extremely satisfied with the relationship – 41% versus 17% of plan sponsors with advisors who do not offer these types of services.