On a positive note, many are refining their investment offerings and plan design
NEW YORK, Dec. 5, 2017 /PRNewswire/ — AllianceBernstein L.P. (“AB”) today announced new research showing that fiduciary awareness among defined contribution (DC) plan sponsors has deteriorated significantly in recent years.
Even though all survey participants qualified as plan fiduciaries, nearly half (49%) of plan sponsors did not consider themselves fiduciaries – a troubling increase from AB’s last survey in 2014.
The good news is that there is a growing recognition among sponsors of how hard it is to effectively educate participants about retirement investing, and many sponsors are continuously refining their investment offerings and plan design – including conducting reenrollments with a qualified default investment alternative (QDIA) – to improve workers’ retirement savings and confidence.
“By 2060, nearly 24% of the US population or close to 100 million people will be over the age of 65, but few Americans are prepared for retirement. What’s equally concerning is that plan sponsors now face added responsibilities under the DOL’s new fiduciary rule, yet they’re less aware of their fiduciary status today than before – and because of legal ramifications, what you don’t know can hurt you,” said Jennifer DeLong, Head of Defined Contribution at AB. “These are clearly challenging trends in the DC landscape that require action and change. Plans and sponsors will need to consider all the comprehensive tools available today – for the benefit of plan participants, as well as their own.”
Key findings include:
Fiduciary awareness among DC plan sponsors continues to slip
49% of plan sponsors do not consider themselves a fiduciary, up from 37% in 2014 and 30% in 2011. Fiduciary awareness is lowest in two categories of plan sponsors – those on investment (39%) or administrative (22%) committees. But even among those plan sponsors who say they have primary responsibility for the plan, one-third don’t believe they are fiduciaries. Fiduciary training programs for plan sponsors could also be improved: about half the respondents who have access to a training program do not think the training is comprehensive. And while 80% of respondents say their plans document the fiduciary process, more than half of them feel the process could be improved.
One way to boost fiduciary awareness and appreciation is to hire a financial advisor or consultant. Sponsors who use a financial advisor or consultant have a better understanding and awareness of their fiduciary responsibilities. More plans using advisors also show increased participation rates (49% vs. 40% for non-advisor plans), increased average savings (57% vs. 37% for non-advisor plans), and participants improving their retirement readiness (22% vs. 11% for non-advisor plans).
Reenrollments into the QDIA steer participants into more effective investment options
Nearly 60% of sponsors were most concerned that participants lack awareness of how much they need to save for retirement needs, and 54% said participants do not understand their investment options. Many workers who actively choose investments for their accounts don’t make the best choices and some make no choices at all. Thus, reenrollments with a QDIA have become an increasingly popular way to remove asset-allocation guesswork, and boost participation rates, deferral rates, diversification and retirement readiness. Forty-percent of sponsors have recently done a reenrollment and 23% are considering it in the next two years – showing improvement since 2013, when only 10% of sponsors would consider a reenrollment in the future.
Quality of asset management becoming a greater driver of QDIA selection
Use of target-date funds continues to grow, most notably among micro plans (less than $1 million in AUM), up from 33% in 2014 to 40%. Respondents point to performance first (54%) when asked about what they think are the most important attributes, followed by cost (41%), quality of asset management (40%) and appropriate glide path (32%).
With fees coming under greater scrutiny each year, one way plans could find cost savings is by using collective investment trusts. Roughly 40% of plans still use first-generation, off-the-shelf proprietary mutual funds but the industry is seeing rapid growth in collective investment trust series.
DC plan sponsors differ in philosophy on how to handle retired participants’ balance
By 2060, 100 million Americans – nearly a quarter of the US population – will be aged 65 or older. This shifts pressure to DC plans and how involved plan sponsors should be in participants’ DC account decisions when they retire. When plan sponsors are asked about their organization’s philosophy regarding terminated or retired participants’ balances in the plan, the most common response (37%) is that participants should roll over their assets into an individual retirement account (IRA) or another qualified plan. The next most-cited response (28%) is that their company has no philosophy one way or another. Eighteen-percent of respondents feel participants should keep their money in the plan, while only 7% see taking a lump-sum distribution (a cash-out) as the answer. Only half of the survey respondents’ organizations even track the percentage of participants who cash out.
But cash-outs at retirement are a growing concern in an America of increasing life expectancy and decreasing retirement readiness. One in five plan sponsors would prefer participants leave their money in the plan. If they do, the plan could negotiate better fees by virtue of higher balances. And plan sponsors could explore offering a variety of distribution options – such as guaranteed lifetime income solutions – to ensure participants have appropriate options to take them through retirement.
Financial wellness programs viewed as a smart investment
Financial wellness programs, while broadly defined, are gaining popularity as formal programs at companies. Four in ten plans offer them and cite important beneﬁts: employees are more productive and focused, and one-third say employees are less stressed from having improved their financial knowledge and confidence.
Click here for a copy of AB’s report: Inside the Minds of Plan Sponsors: Moving to the Future of Defined Contribution Plans
AB is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals and private wealth clients in major world markets.
At September 30, 2017, AB Holding owned approximately 35.2% of the issued and outstanding AB Units and AXA, a worldwide leader in financial protection, owned an approximate 64.9% economic interest in AB.
Additional information about AB may be found on our website, www.alliancebernstein.com.