Enactment of the SECURE 2.0 Act, ongoing industry innovations, and the aim to provide greater personalization are among the many opportunities that plan sponsors have to align DC plan features, practices and investments with participant needs.
Indeed, the need for greater personalization of the user experience reflects growing expectations among younger workers for a “consumerized digital experience,” and there remains a significant opportunity to improve and integrate platforms with broader financial wellbeing solutions for participants. What’s more, changes under the SECURE 2.0 provide new opportunities to enhance benefit offerings. At the same time, however, plan sponsors are faced with an increasingly litigious environment. Moreover, amid growing investment complexity and inflationary pressures, plan sponsors will need to look at investment menus from a more holistic perspective that helps solve for their workers’ overall financial needs and insecurities.
With that as a backdrop, benefits consulting firm Mercer in “Top Considerations for Defined Contribution Plans in 2023” takes a deeper dive into five themes that are shaping the industry and offers recommendations for plan sponsors to consider. “With the challenges and opportunities ahead in 2023, thoughtful strategic planning will propel DC plan sponsors toward potentially bringing the greatest benefit to participants while balancing resources,” the report states.
The future of tools and technology. Significant opportunities remain to improve and integrate the user interfaces of recordkeeping platforms with financial wellbeing solutions for participants. Specifically, virtual experiences — such as user interface design — and machine learning will have profound impacts on participants’ financial journeys, according to the report. For instance, machine learning is being harnessed in the design of customized online and app-enabled experiences for participants who can engage them based on their individual decision-making patterns.
Thus, plan sponsors will need to balance the benefits that technological developments can bring to participant engagement with communication and privacy requirements, Mercer suggests.
“Expansion of target date solutions that incorporate guaranteed income or managed payout features could be increasingly important pieces of the income puzzle, especially if paired with technology solutions that analyze participant data and the need to optimize the hundreds, if not thousands, of ways a participant can draw down their collective savings and retirement benefits.”
At the same time, Mercer notes that independent managed account providers are expanding their reach to broader financial wellbeing services in direct competition with some recordkeepers. “As this push-and-pull evolves, we anticipate that the more innovative providers who strike the right balance between automation and personalization will see the greatest adoption by sponsors and participants.”
More relatable organizations and equitable retirement systems. Regarding the recent enactment of SECURE 2.0, the report suggests that some mandatory provisions will help drive toward more equitable retirement systems, while many optional provisions aim to provide financial flexibility and access to assets when under financial stress. “This dynamic approach may make long-term savings more palatable and could potentially help mitigate systemic inequities,” Mercer observes.
Accordingly, plan sponsors should be considering which provisions will benefit their population and how to frame their decisions within their broader benefits and talent strategy. Consequently, plan sponsors should consider conducting demographic analysis to understand how different cohorts of participants are using plan design and investment features, and to identify gaps and opportunities. Moreover, sponsors should evaluate optional SECURE 2.0 provisions to determine which of them may best help address gaps within current benefit design, the report recommends.
Minimizing risk in a litigious environment. Meanwhile, as cyber threats and fraud attempts to DC plans mount, accompanied by an active plaintiff’s bar around these and other issues, plan sponsors should consider evaluating the risks and coverages afforded by third-party vendors.
In fact, the Department of Labor’s 2021 guidance on cybersecurity best practices prompted deeper inquiries by sponsors and fiduciaries into their vendors’ security practices, and uncovered potential new risks associated with DC plan management, which the report notes that in some cases has raised the possible need for broader insurance coverage. “While there currently are no requirements for employers to have cyber or data security insurance, plan sponsors may find supplemental coverage necessary or useful depending on the types of guarantees made by third-party vendors,” the report states.
Among Mercer’s suggestions for plan sponsors include:
- ensuring that administrative practices are in compliance and well-documented;
- conducting recordkeeper fee benchmarking studies approximately every three years and RFPs, when appropriate;
- assessing investment strategies for lower-cost vehicles and share classes at least annually;
- taking advantage of institutional vehicles, such as collective investment trusts and separate accounts; and
- reviewing vendors’ cybersecurity warranties to identify limitations and conditions, and negotiating commitments in the service agreement, which the report notes are often not addressed.
Inflation and financial markets. Turning to current economic conditions, Mercer observes that most participants have never experienced inflation hitting multi-decade highs with equities and bonds experiencing negative returns at the same time, leaving workers stressed and looking for a safe haven. Consequently, plan sponsors should consider examining their investment menus from a more “holistic perspective” that helps solve their workers’ overall financial needs and insecurities.
Additionally, alternatives such as private equity and credit as well as private real estate and unlisted infrastructure may provide notable relative protection in a multi-asset (e.g., target date) construction.
Freeing staff resources. Finally, litigation risk and pending regulatory guidance on multiple fronts make it difficult for benefit teams to focus strategically rather than dealing with the day-to-day aspects of managing their plan. Amid these resource constraints, Mercer suggests that partial, full or expanded DC outsourcing can not only lessen investment monitoring, decision making and fiduciary risk, but can also reduce time spent on plan administration, reduce legal costs and provide expert support on managing expanding fiduciary roles. “We are already seeing corporate DC plans look to the most expanded form of outsourcing through Pooled Employer Plans (PEPs), a trend that we anticipate will continue in 2023 for the aforementioned reasons, in addition to the door being further opened to 403(b) plans now that SECURE 2.0 has passed.”