Towers Watson: More DC plans whittle their investment choices

More defined contribution plan executives reduced their core investment options to simplify choices for participants, according to a new report by Towers Watson issued Thursday.

The percentage of DC plans offering more than 20 options decreased to 24% from 32% in a 2010 survey, the report said. Meanwhile, DC plans offering 10 to 19 options increased to 69% in 2012 vs. 64% in 2010, and plans offering 1 to 9 options increased to 7% from 4%.

“Sponsors are trying to keep the investment lineups simpler,” Robyn Credico, defined contribution practice leader at Towers Watson, said in an interview.

While sponsors are consolidating investment options, many “have preserved flexibility” by adding self-directed brokerage accounts, the report said. Towers Watson's report said 42% of respondents offer brokerage accounts in 2012. The company didn't ask this question in the 2012 survey.

Brokerage accounts provide more choices for the more sophisticated investors as well as for the “more noisy investors” who might be upset with plans' reducing core investment options, Ms. Credico said.

The report also identified a difference between what sponsors identified as the purpose of offering a DC plan and what they said was the goal of plan design.

Seventy-four percent said they offered a DC plan to provide “an adequate retirement income at a reasonable age.”

However, when asked for the top issues driving plan design, 46% cited the “workers' ability to retire at a reasonable age and benefit level,” the report said. That response ranked fifth behind remaining competitive with peers (69%), the cost of the plan (63%), retaining and attracting workers (55%) and complying with laws and regulations (47%). The survey allowed for more than one answer.

“That's a pretty interesting finding,” Ms. Credico said.

The report also found that guaranteed lifetime income distribution options in DC plans remain rare, with only 6% offering one. One percent said they will offer such an option by the end of 2013, while 31% said they are considering it but haven't planned anything. Sixty-one percent aren't considering it.

The top reasons for not offering a lifetime income option were lack of participant demand (60%), administrative complexity (49%) and fiduciary risk (34%).

The Internet-based Towers Watson survey was conducted in April and May, and it received 371 responses from 401(k) executives in plans with more than $10 million in assets and more than 1,000 employees. Thirty-six percent had assets greater than $1 billion and 44% had more than 10,000 employees.