The Future of Defined Contribution Plans

July 17, 2018
By Brian O'Keefe
In the coming weeks, millions of Americans will reconnect with the great American tradition of “summer reading.” For decision makers in the asset management industry, that may include a number of recently released reports on evolving trends within the defined contribution marketplace. This post collects and summarizes a few of those reports, touching on aspects such as access, retirement income, and the dominance of target-date funds.

1. More access to retirement saving plans is coming.
State Street Global Advisors’ Spring 2018 issue of The Participant takes a global look at retirement challenges. The U.S., Australia, the U.K. are all seen as having mature DC systems, but the U.S. differs in that it has not required that all employers automatically enroll employees in a plan, leaving one to conclude that it is not a question of if the U.S. will close this gap, but when and how.

The seeds of expanded access have already been planted: five states (Oregon, California, Illinois, Connecticut, and Maryland) have already enacted legislation that requires automatic enrollment in a retirement plan. OregonSaves, the state’s sponsored automated retirement saving plan, recently reported positive results for its first year of operations: 32,000 enrolled participants, $4.6 million in savings, and a 5.1% average deferral rate. Expect the debate around how to “improve access” to DC plans to continue for several years, but it ultimately stands to reason that universal auto-enrollment of some sort will happen.

2. Solutions to the retirement income challenge may come from outside (not inside) the plan.
Alight Solutions’ 2018 Hot Topics in Retirement and Financial Well Being report found that more employers than ever are providing options for participants to convert their balances into retirement income, while Greenwald/CANNEX’s 2018 Guaranteed Lifetime Income Study found the perceived value of guaranteed lifetime income in retirement continues to grow.

The environment would seem ripe for growth but, unfortunately, Alight found that few plans (<15%) offer access to products and services that will guarantee future income payments, citing fiduciary and operational and administrative concerns as the biggest inhibitors to widespread adoption. It’s hard to see those concerns fading without significant assurances or concessions from providers or regulators, but even that might not be enough. Rules that have helped make qualifying longevity annual contracts (QLACs) more accessible to 401(k) plans do not seem to have materially expanded their presence in the industry.

What happens next is anyone’s guess, but the debate surrounding the need for in-plan options will continue to be fragmented. Future solutions may involve combining legislation/products/services outside of traditional plan design, such as changing distribution rules to allow participants to purchase irrevocable deferred fixed annuities with DC assets at any time.

3. The dominance of target-date funds will (eventually) be challenged.
Since becoming approved as a qualified default investment alternative (QDIA), target-date funds have seemingly found no limit to their popularly. Vanguard’s How America Saves 2018 report found that 51% of its participants were invested in a single target-date fund – almost four times the comparable number (13%) from 2008 – and it projects the number will continue to rise to 70% by 2022. What’s interesting is that the number of participants invested in a single balanced/target-risk fund (4%) or a managed account (3%) is largely unchanged during the same period.

Target-date funds are currently the unquestioned apex-predator in the hunt for DC assets, but it is worth pondering whether there might be an asteroid out there that could threaten their dominance. After all, framing recommendations on a single variable (i.e., age) may be simple and convenient but it also seems stuck in the last decade given the many consumer-focused technologies and industries that are using multi-factor data to cultivate deeper, more personalized experiences for clients.

The first clouds on the horizon are already forming. Three years ago, Willis Towers Watson presented a compelling answer to a simple question, “Are Managed Accounts a Better QDIA?” In 2017, they revisited the topic, noting that “today’s [managed account services] may not be tomorrow’s solution,” and this year, companies like Fidelity and Empower introduced “dynamic managed accounts” – a QDIA that starts out as a target-date fund but moves participants to a managed account upon reaching a particular milestone (i.e., age, balance, etc.).

Can managed accounts, which convey the same fiduciary protections and benefits as target-date funds yet also develop more personalized investment allocations, finally start to rain on the target-date fund parade? Perhaps, but it will likely take many years for the first showers to arrive and much longer, perhaps even decades, for those showers to strengthen into a full-fledged hurricane.

Looking for more summer reading? Consider PLANSPONSOR magazine’s 2018 June/July issue, which contains results from our annual Recordkeeping Survey

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