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About this survey
Over the past few decades, defined contribution (DC) plans have evolved from a supplemental retirement vehicle to the primary retirement vehicle for many Americans. The DC industry has evolved concurrently with this change — creating innovations such as auto-enrollment and target-date funds (TDFs); however, this evolution has brought with it significant scrutiny from regulators and a cacophony of litigation. Today, we stand amid this backdrop as 2020 has brought extraordinary challenges and opportunities into the DC space, including new investment opportunities, unprecedented legislation and ever-changing risks.
We believe we are approaching a new stage in the evolution of DC while standing in the middle of a heightened fiduciary risk environment. Plan sponsors are facing a crossroad and are asking themselves: How do we manage risk today while planning for tomorrow, and what is our role as DC plans evolve from supplemental savings plans to primary retirement and savings vehicles?
Of the 464 U.S. plan sponsors in the survey, 78% reported that their DC plan is the sole retirement offering to new employees.
The results of our DC survey highlight the value of DC plans both to participants and employers. Of the 464 U.S. plan sponsors in the survey, 78% reported that their DC plan is the sole retirement offering to new employees. And 90% of sponsors recognize that their DC plans are important, or very important, for maintaining a competitive organization, while nearly as many view their DC plans as an important tool for attracting talent.
Plan sponsors are also attuned to the ongoing financial stresses of employees and understand the support that an expanded DC plan offering can bring during the working years as well as in retirement. Accordingly, almost two out of three sponsors reported that they either currently offer or are seriously interested in adding innovative design features, such as student debt repayment assistance, flexible benefits and emergency rainy-day savings accounts. DC plan sponsors are interested in offering plans that actively support participants as they build an adequate retirement and achieve financial resilience. Moreover, sponsors are arguably in the best position to provide valuable tools and resources.
Beyond retirement savings
Willis Towers Watson’s 2020 Defined Contribution Plan Sponsor Survey focused on four areas: plan design, investments, plan administration and risk management, and retirement readiness/financial wellbeing.
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Plan design
Sponsors eye innovative designs to empower employees and optimize outcomes
Plan design is an important component in helping sponsors plan for tomorrow today. As we look ahead, we see many innovations in the DC space that sponsors are offering participants to increase their savings flexibility. There is a constant flow of new products and design approaches, and plan sponsors have been increasingly receptive. The sidebar below sets out eight such innovations.
Sponsors look to broaden plans and engage participants with innovative plan features
- Emergency funds via Roth plans or other after-tax contributions
- Integrated repayment of student loans
- Promoting health savings account/401(k) contributions
- Flexible choices from benefit menus, including DC contributions
- Directing paid time off to DC plan contributions
- Rewarding contributions such as service anniversaries
- Varying contributions by workforce segments
- Rethinking the balance between employer and employee contributions
Our recent survey revealed that two out of three sponsors have added these features to their DC plans or that they are very interested in doing so. The highest actual uptake, and inclination for the future, is assisting employees in building emergency funds by offering Roth or other after-tax contribution features: 45% currently offer or are interested in such features.
Second in interest level is linking debt repayment to the DC plan — allowing employees to work down their loans while still benefiting from employers’ contributions toward retirement. Only 2% of survey respondents had adopted this feature, but 19% are strongly attracted to it. About one in 10 plans are allowing employees to choose their own mix of benefits, including DC contributions, and about as many sponsors show strong interest in the idea.
Past evolution in DC plans continues
Since the enactment of the Pension Protection Act of 2006, the DC industry has been evolving — and plan sponsors have been evolving right along with it. From a plan design perspective, this evolution has included auto-enrollment and auto-escalation. The 2020 survey shows that these features are building on past successes: Automatic enrollment adoption increased slightly from our last survey effort, having been adopted by 76% of plans, up from 73% in 2017 and 52% in our 2009 survey. This trend has led to increasing levels of plan participation: In plans that enroll employees automatically, participation stands at 89% versus 72% in plans that do not employ automatic enrollment.
More than half of sponsors in our survey have set their default enrollment employee deferral rates at levels to receive the full employer match. Moreover, nearly all sponsors that implement automatic contribution escalations set their deferrals at or above the level that draws the full match.
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Investments
Innovation in the DC space is not limited to plan design, as our survey found greater momentum in finding ways to address the challenge of distributing income in retirement. Currently, 16% of plans offer lifetime income options in the DC plan, and 6% offer lifetime income as an outside feature (i.e., a commercial annuity that can be purchased with funds from a participant’s DC plan account). Another 15% and 10%, respectively, are planning for or considering lifetime income to be added in the next two years. This interest represents a significant change in sentiment from our 2017 survey, when just 7% of employers offered or were planning or considering providing in-plan lifetime income — a fourfold increase over the past three years. Clearly there is an increased focus on retirement spending, not just retirement savings.
In addition, the investments available to DC plan participants have seen substantial upgrades. TDFs have become a nearly unanimous offering, providing participants with age- and risk-appropriate, professionally managed portfolios. (In the current survey, 92% of plans offered TDFs as the qualified default investment alternative [QDIA].) Moreover, nearly half of plans had streamlined their investment options over the prior five years, giving participants a less bewildering set of choices and concurrently emphasizing the importance of the remaining investment options and QDIA.
Importantly, our survey showed that employers are taking a more expansive view of the performance of their plans’ TDFs. Nearly all conduct quarterly reviews of investment performance and review fees; however, an increasing number also are reviewing the qualitative success of the TDF proposition: 40% monitor the glide path from a demographic perspective, up from 26% in 2017. We believe this increased focus on the fit of TDFs is representative of the next evolution of DC.
DC plans are evolving from primarily a retirement savings vehicle to a comprehensive lifetime savings account and retirement spending vehicle. The types of investments available need to innovate and work harder so as to align with each participant’s multiple time horizons — especially for the QDIA serving the most disengaged participants.
Another innovative feature employers are exploring today is custom investment options.
Another innovative feature employers are exploring today is custom investment options. Custom-designed white label or private label funds can provide participants with opportunities to diversify from the public equity and fixed income markets and incur lower costs while doing so; however, among the survey respondents, only one in six has built them into its plans, and about as many are planning for or considering them in the near future. That said, from our survey it appears as if the biggest barrier to implementation is the lack of initial discussion: Over half of plans not offering custom vehicles said their committees had not discussed them.
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Plan administration and risk management
Employers can’t lose sight of managing risks
While employers focus on ways to enhance plan design to better serve employee needs, plan fiduciaries cannot lose sight of managing the risk inherent in their plans today. This is underscored by the litigious DC environment that has clearly left a mark, as we saw a 14 percentage point increase from 2017 in committees citing the management of administrative and investment fees as a major priority.
What are fiduciaries doing to combat these risks? Most survey respondents (75%) have benchmarked their recordkeeping fees over the past three years. Many that have done so have seen meaningful results: About two-thirds of respondents reported that their benchmarking resulted in lower administrative fees, while a third were able to reduce investment expenses.
Almost 3 out of 4 respondents have conducted a fee & service benchmarking study over the last 3 years, most with meaningful results...
26%resulted in enhanced services32%resulted in reduced investment expenses64%resulted in reduced administrative feesIn addition to managing plan fees, what other risks are top of mind for plan fiduciaries? When asked about their level of concern with respect to an array of risk management and fiduciary issues, the cybersecurity of participants’ accounts topped the list. About 40% of respondents reported that they were very (or extremely) concerned over the safety of participant assets. Broadening to include those who are concerned to extremely concerned, that number grows to 70%. Employers appear to be acknowledging the reality that nefarious actors are increasingly targeting DC plan participant accounts, which if not properly protected can be susceptible to hacking attempts. The risk of such invasions may be heightened given the prevalence of remote working from the COVID-19 pandemic and possible increased exposure of personal information.
As plan fiduciaries grapple with meeting their increasingly challenging obligations, many are reconsidering their governance model. In fact, our 2020 survey brought to light an acceleration of the new trend in fiduciaries turning to consultants for delegating certain investment decisions relating to their plans. While 72% of respondents reported working with consultants on a 3(21) advisory basis (down from 81% in our 2017 survey), 15% noted having entered delegated or 3(38) relationships, up from 6% three years earlier — a 250% increase. Delegated services are used more often by smaller plans — in the survey, by 29% of those with assets under $200 million, and 19% for plans between $200 million and $500 million.
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Retirement readiness and financial wellbeing
Employees’ financial wellbeing, and the potential impacts on their organizations, is a front-of-mind concern for many sponsors. Just over one-third indicated that short-term financial stress among workers was creating current workforce challenges — an increase from 26% in our survey of DC plan sponsors three years ago. Moreover, about as many employers expected short-term financial stress among employees to present future challenges to their companies as well. However, employers that continue to offer DB plans were less likely to report concerns over retirement readiness and financial stresses on their workers.
One-third of sponsors are concerned about workforce challenges due to employees’ financial distressAs for retirement readiness, one company in five reported current difficulties in workforce management because older workers cannot afford to retire, while 28% foresee such challenges in the future (less so, however, for sponsors with open DB plans). Over half of sponsors reported reviewing participants’ retirement readiness every year or every three years. These measures are up from our 2017 survey, but with the personal and organizational stakes so high, a great number of sponsors should consider keeping a closer watch on participants’ retirement progress.
Guidance is the favored solution
In addressing these stresses, most employers agree that companies should provide guidance to employees. About 90% believe in educational support for both short-term stresses and retirement readiness. Moreover, our survey work with employees shows that employees highly value their retirement plans: In the U.S. component of our 2020 Global Benefits Attitudes Survey, 63% of employees expressed that during the COVID-19 pandemic their retirement plans had become more important than ever, and 53% cited saving for retirement as the most important help their employers provide.
We believe these are all components of the DC evolution. In the past, plan sponsors have mainly focused on retirement readiness, with some looking to provide educational support for short-term financial stress; however, the CARES Act and the adoption of these short-term relief provisions have thrust plan sponsors into the financial wellness business. And while we haven’t seen significant take-up by participants, we believe that this easy accessibility to participants’ DC assets will be turned on again during the next economic or global crisis.
The question for plan sponsors then becomes: How? Many plan sponsors reported seeing value in personalized guidance — just above half for short-term stresses and about two-thirds for retirement readiness. Offering guidance on financial wellbeing to employees, however, is mixed: Sponsors most often offer the solutions of seminars and access to financial advisors on both retirement savings and current financial wellbeing. Relatively few, however, believe them to be highly effective tactics (about one-fourth and one-third, respectively).
Those measures that sponsors do find more effective are provided less often: While 41% of sponsors that provide access to independent financial advisors (that is, those not affiliated with the DC plan) believe them to be very effective or extremely so, just over one-fourth of all sponsors offer the service. About one-third of employers that provide personalized analytics find them to be highly valuable, but about half of all sponsors offer them.
Looking ahead to what’s next
Many employers in the survey have included their DC plans in commitments to inclusion and diversity (I&D) in their organizations, and we believe this will flow through to DC plans in the future. Planning for tomorrow today includes thinking about the intersection of I&D and retirement programs — extending to plan provisions, governance structure and retirement outcomes, among other factors. This trend has gained significant momentum: Nearly two-thirds of employers have reviewed or plan to review their plans’ moves toward I&D, and one-third have followed up with a change. As DC plans become ubiquitous throughout the U.S., we believe viewing the plan through an I&D lens could greatly improve the applicability and success of the plan to all employees. For example, this could include a review of the plan’s governance structure and measuring the diversity of thought in a committee’s decision-making process.
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Future growth and benefits
Our 2020 DC plan survey, fielded amid the challenges of the COVID-19 environment, underscores the need for employers to be open to designing and managing their DC plans in ways that will optimize participant outcomes, both in the short term and for progress toward retirement. While the proportions are higher than in prior years, only about half of employers are making fully informed judgments on participant retirement readiness through projections on retirement income needs.
It is encouraging, however, to see the many efforts sponsors have made to broaden features, building greater flexibility into their plans. Evolution in DC plans will encourage employees toward greater reliance on these plans, navigating their financial stresses in the present and enabling them to continue saving for retirement as well.
Responses were dominated by larger plans:
Percentage of respondents with larger plans Plan size Percentage $5 billion or more 16% $1 billion to $5 billion 36% $500 million to $1 billion 21% $200 million to $500 million 17% Under $200 million 9% Many sponsors continue to offer defined benefit (DB) plans in some fashion:
Percentage of respondents that offer DB plans Plan Type Percentage Open DB 22% Closed DB 31% Frozen DB 31% DC only 16%
Survey demographics
The 2020 Defined Contribution Plan Sponsor Survey, conducted in September 2020, drew responses from 464 U.S. sponsors in the Willis Towers Watson client base.
Many industries were represented, led by manufacturers at 23% of responses; hospitals and health care firms at 13%; and insurers, utilities and financial institutions at 8% each.
Disclaimer
The information included in this presentation is intended for general educational purposes only and does not take into consideration individual circumstances. Such information should not be relied upon without further review with your Willis Towers Watson consultant. The views expressed herein are as of the date given. Material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Willis Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this presentation should not be relied upon for investment or other financial decisions, and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this presentation to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.
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