Retirement Income Adequacy Growing in Importance in Plan Design Decisions

As the evolution of DC plans continue, plan sponsors are shifting from a “traditional view” of offering plans as a recruitment and retention tool to focusing more on participant outcomes, according to a new study by J.P. Morgan.

In the report, “2017 Defined Contribution Plan Sponsor Survey Findings,” the authors state that, “Plan sponsors are more intent than ever on helping participants reach a financially secure retirement. We see this in the importance assigned to outcome-oriented plan goals and success criteria and in the main reason cited for offering their plans.”

Evolving Philosophies

This evolving focus is demonstrated in plan sponsors’ stated philosophies, objectives and actions, the findings show. In past surveys, plan sponsors alternated between “attracting and retaining employees” and “encouraging employees to save for retirement” as their No. 1 and No. 2 priorities, while “ensuring employees have sufficient income in retirement” was a distant third.

The latest survey shows a continual decline in the two traditional objectives. Meanwhile, plan sponsors citing income in retirement as the main reason doubled — from 12% in 2013 to 24% in 2017. In fact, among large plans, sufficient income in retirement is now the most frequently cited reason for offering a DC plan.

Employees’ overall financial wellness is also high on the minds of plan sponsors, as 82% say they feel a “very high” or “somewhat high” sense of responsibility for their employees, representing a 23 percentage point increase over 2013.

“We see this focus on outcome-oriented objectives as driven by a greater sense of responsibility for participants’ financial wellbeing. And this emphasis is empowered by a philosophy that values placing participants on an effective saving and investing path to retirement,” the report explains.

Plan Design Strategies

To that end, plan sponsor viewpoints on driving participant decisions is also undergoing a shift: More than half of plan sponsors now have a proactive placement philosophy versus a participant choice philosophy (55% vs. 45%).

Noting that “proactive placement philosophy” may be better aligned with what participants want from their employers, the report suggests that participants may be “receptive to trading some degree of autonomy for plan features and strategies designed to offer a disciplined approach to saving, simplified investment decision-making and the potential for improved asset allocation.”

Plan sponsors are also taking definitive steps to strengthen their plans through the use of innovative design features and strategies, although there is room for broader implementation. The findings show sizable differences in implementation of design features between large plan sponsors and total plans:

  • 85% versus 64% have implemented automatic enrollment;
  • 77% versus 50% have implemented automatic contribution escalation;
  • 80% versus 62% offer target date funds; and
  • 20% versus 13% have conducted or plan to conduct a re-enrollment.

‘No Time for Complacency’

With DC plans continuing to evolve, the report emphasizes that financial advisors have an opportunity to “build stronger relationships with plan sponsors by being the proactive partners” as these decision-makers look for innovative ideas, best practices and cost-effective solutions.

While nearly 80% of plan sponsors say they use a financial advisor or consultant, only 27% label this relationship in proactive terms. Providing updates on regulatory changes, adding new investment strategies and plan design innovations and helping plan sponsors understand the benefits of automatic features are among the proactive strategies that financial advisors can pursue. In addition, the report suggests that advisors can clarify their own fiduciary duties and help plan sponsor fiduciaries understand theirs.

Conducted in January 2017 in partnership with Mathew Greenwald & Associates, the online survey consisted of 968 plan sponsor decision-makers of 401(k) or 403(b) plans to their domestic U.S. employees with at least 10 full-time employees.

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