Plan Sponsors Have Work to Do lineups, portability, communications, income under review as workforces evolve

or years, defined contribution plans were relegated to some- thing the human resources department would ask employees to consider once or twice a year. For many workers, even those F with access to a company match and a few basic investment options, DC plans were an afterthought or ignored. Fortunately, DC plans have evolved as the attitudes of plan sponsors, employees and service providers have changed to re- flect an increasingly diverse and mobile workforce, a greater ap- preciation of the financial challenges that employees face, and the continued decline in the availability and use of defined ben- efit plans. “There are two really interesting things in the marketplace,” explained Sri Reddy, senior vice president of full service invest- ments at Prudential . “One, DC plans are becoming a primary vehicle for virtually all employees. Two, the very nature of the U.S. workforce is changing. More and more employees are moving to contract or part-time status and a lot of them are becoming part of the ‘gig’ economy.” He added: “So what does a retirement plan look like for that group, and how, as an , are we crafting solutions and positioning ourselves to help them save for retirement?” Parts of those solutions already exist, with more diverse in- vestment options, greater plan portability and tools that make saving and investing more accessible online or anywhere a worker happens to be. Often, however, the tools, communications and investment options are available at larger plans, suggesting that one area the industry needs to focus on is figuring out how to bring

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PS004.pdf RunDate: 10/02/17 PI Trends in DC supp 8 x 10.875 Color: 4/C smaller companies, which are also interested in offering The survey also noted that more than six of 10 plan these benefits, into the fold. sponsors (60.8%) were either somewhat or very likely to con- “I'm hopeful that we'll see more flexibility and cus- duct a fee study in 2017. That’s up from 52% last year. Other tomization of investment options for a broader spectrum of somewhat or very likely actions include renegotiating record- plans,” said Greg Jenkins, a managing director and head of keeper fees (49.5%) and switching to lower-fee share classes institutional defined contribution at Invesco. “I think man- (48.5%). agers and service providers will find ways to bring institu- “I think more and more, given the litigation environ- tional investment capabilities down-market, making it ment, the regulatory changes, the rule and all the simpler and less daunting from a governance standpoint.” activity out there, it feels like there’s more attention being Demographics, investment choices, plan tools, com- paid to [the] fiduciary role and how plan sponsors should be munications and governance are issues of plan design, spending their time,” said Lorie Latham, senior DC which is not simply a set-it-and-forget-it proposi- strategist at T. Rowe Price. “And I think that’s tion. Design must consider the full work cycle instigating some fear-based decision- of the employee, even into the retiree making.” phase. In terms of how plan sponsors should prioritize DC issues, Latham FINANCIAL CHALLENGES said, “I would put fiduciary con- Kristen Colvin, director in the siderations [as] No. 1. I would put Investment Solutions Group at fees [as] No. 2.” MFS , 26% “Fees matter,” added Pru- said retirees are very conscious of dential Retirement’s Reddy. “I maintaining their lifestyle and DC plan participants think you want to have the ap- generating income from their in- propriate focus on fees as a plan vestments post-work. who plan to stay sponsor, but don’t confuse low As such, plan sponsors need to cost for value. If help participants and retirees under- in the plan aren’t doing what they need to do, stand how to save and invest their re- which includes providing appropri- tirement assets and how to manage the in retirement ate risk management, appropriate di- financial challenges that arise when they versification, appropriate exposure and are drawing down those assets in retirement. the potential to generate alpha, it may not According to the 2017 MFS Global DC Retire- help plan participants get what they need, which ment Income Survey, 26% of current participants expect to is getting to and through retirement with an income they stay in their employer’s plan after retirement, but the real- don’t outlive.” ity is that more than half of the retirees surveyed had The issue of plan sponsors assisting participants stayed. The message for plan sponsors, according to Colvin, through retirement raises the question of whether those par- is that retirees need help with investment selection and al- ticipants will keep their savings in the plan once they retire. location. The survey also highlighted the fact that retirees It’s more complicated than one might think. value having access to strong investment products. The conventional wisdom is that as greater fiduciary re- One of the interesting takeaways from the notion of re- sponsibility is placed on financial advisers, more money may tiree investments is how best to plan for the next crop of re- stay in plans. tirees, today. “As we think about the millennial generation in the U.S., ROLLOVERS DOWN? most won't have access to a DB [plan],” Colvin explained. “By “With the heightened fiduciary focus that could be ap- the time they retire, their DC plan will be their primary source plied to financial advisers, we think there’s a good opportu- of retirement income. So how can we start making changes nity that there may be a rapid decrease in the amount of now as an industry to address the needs that we know will be rollovers that occur out of defined contribution plans and into coming, and are already existing for many participants and IRAs,” asserted Warren Howe, national director of stable retirees?” value markets at MetLife. “And when a participant rolls over Any discussion of plan design must include fees. The their savings, they may face higher fees than they do in their raft of litigation and the machinations of the U.S. Depart- 401(k) plan they are leaving. Because of this, participants ment of Labor’s fiduciary rule have put fees front and center may leave more money in plans instead of rolling over into for plan sponsors. According to a Callan Associates survey, IRAs.” 2017 Defined Contribution Trends, the most important step On the investment side, some options can bring down plan sponsors took within the past 12 months to improve costs depending on the products’ management (for exam- the fiduciary position of their DC plan was to review plan fees. ple, passive or active), branding, size and scope. White-la- This ranked significantly higher than any other activity un- beled funds are one option plan sponsors have that can help dertaken, such as changing their communication programs, them make changes to their plan without extensive com- auditing measures, changing investment options, munications, allow for reduced fees and generally ease ad- and updating or reviewing the investment policy statement, ministrative duties. just to name a few. “White-labeling gives plan sponsors much more flexibility

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PS005.pdf RunDate: 10/02/17 PI Trends in DC supp 8 x 10.875 Color: 4/C CONTINUED FROM PAGE 5 with every aspect of their core investment menu, including the underlying managers, the pricing and the naming of the options,” noted Invesco’s Jenkins. “It also helps ad- Where do you turn dress a dilemma plan sponsors have faced for many years, and that is how to offer greater diversification to partici- pants without making the menu more complicated. It’s also for help with important for plan sponsors to remember that, even if you are not ready to move to a white-label approach yet, you retirement should really start the discussion sooner rather than later. It is a long process and doing it correctly takes time and planning.” planning issues?

WHITE-LABEL STRATEGIES According to Colvin at MFS, about a quarter of large plans offer white-label strategies, and the fixed-income lineup may be a good place to start. “Some plans have implemented white-label solutions across their entire menu, while others have started by of-  fering one or two white-label solutions,” she said. “Given where we are today from a fixed-income market perspec- tive, fixed-income seems like an obvious place to consider white-labeling. There's a high degree of uncertainty and complexity in today's fixed-income environment.” Colvin added that in fixed income, “the opportunity to broaden the opportunity set, apply some active security se- PARTICIPANTS: RETIREES: lection and incorporate risk management in the context of being able to control the building blocks of a white-label solution seems like an appealing place to begin the white- 65% 66% label journey, given current market dynamics.” employer-sponsored No longer a fringe idea, white-labeling speaks to plan retirement plan design and the sophistication with which more plan spon- sors tailor their offering for participants. An evolution is tak- ing place that takes advantage of things like scale and 59%49% looking at new and more innovative ways of selecting in- vestment options. financial adviser employer/former “We’re kind of edging in that direction on the invest- employer-sponsored ment side, where people are thinking differently, and so retirement plan they’re deploying portfolio construction techniques, which Note: Respondents could name Top 3. are underlying the investment options,” said Latham at T. Source: 2017 MFS Global DC Retirement Income Survey Rowe Price. “Larger-market plan sponsors are pursuing complementary trading strategies and collapsing style boxes, and this is an important area that’s starting to gain time and attention. Using investment levers to tailor solu- tions at the plan level can be valuable. And perhaps in time, with a more sophisticated mindset, that will continue to progress. I think we’ve learned a lot as an industry around white label and there’s good awareness that it brings quite a lot to consider in terms of administrative and operational considerations.” Of course any discussion of the trends rippling through the DC plan world must include participant edu- cation and financial literacy. All the tools and investment options in the world won’t amount to much if the partici- pants considering them are unable to decipher what will best aid them in their retirement savings (and income) efforts. All of these plan design feature must work in tandem. Patchwork fixes to DC plans involving one or two new op- tions or tools are difficult. A holistic approach appears to be the new norm for DC plan adoption. How the and communications are shaped, what investments are se- lected and regular fee reviews will all help shape the design of future DC plans — whether they are for tomorrow’s mil- lennial retirees or today’s boomer retirees. •

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