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Special report: Outlook 2018

Auto features and deferral rates is where action will be in 2018

Integration of income options, capital preservation also to be emphasized

Toni Brown believes a ‘post-retirement tier’ with more conservative investments will be offered, while annuities will likely be shunned due to a host of concerns.

Defined contribution experts predict 2018 will be a year for sponsors to continue adding or expanding best practices such as auto features and higher initial deferral rates rather than engaging in significant shifts in strategy.

Changes will be evolutionary rather than revolutionary in 2018, said Mike Volo, senior partner, Cammack Retirement Group, Wellesley, Mass. "Things move at a glacial pace," he added.

However, some observers said 2018 will mark efforts by sponsors to assess how plans can better integrate retirement income options. Such an move amounts to a "post-retirement tier" in DC plans' investment lineups, said Toni Brown, a San Francisco-based senior defined contribution strategist at American Funds, part of Capital Group.

Ms. Brown and others aren't forecasting an embrace by more plans for using annuities embedded in DC plans, because they believe the absence of expanded safe-harbor regulations and/or laws represents a significant roadblock. Instead, plan executives and providers are discussing ways to offer more conservative investments, managed to reduce volatility, in anticipation of participants' withdrawing their funds at some point, she said.

"There's been a lot of discussions with sponsors," said Ms. Brown, who envisions investments such as risk-based funds being part of the post-retirement tier. The post-retirement tier could include stocks, such as more dividend-paying equities, and bonds "in portfolios that understand how you take money out and deal with the volatility of withdrawals."

The talks stem in part from sponsors' squeamishness about in-plan annuities and the perceived insufficient regulatory safe harbor to protect themagainst the failure of an insurance company providing annuities. The lack of portability and concerns about fees also troubles plan executives, Ms. Brown said.

"We're hearing clients say, 'How can we make this a true retirement system? How can we make this better?'" said Ms. Brown. "It's in the talking stage, but the excitement over this has been unprecedented by sponsors."

She expects some sponsors to implement this strategy in 2018 and 2019.

DC consultant Jennifer Flodin also forecasts sponsors' efforts to add more conservative options, in part to educate participants about the benefits of keeping their money in the plan after they retire. "They realize they have more retirees in their plans," said Ms. Flodin, a Chicago-based managing director of Pavilion Advisory Group Inc.

"They need solutions that are more focused on capital preservation," she said. "It could be a global balanced fund or an income fund – a retirement sleeve in the plan menu."

Sabrina Bailey said sponsors are looking for some sort of customized retirement options that lie between target-date funds and managed accounts.

Sponsors are examining ways to get more detailed information about participants so they can better tailor investment options, said Ms. Bailey, global head of retirement solutions at Northern Trust Asset Management, Chicago.

For example, instead of offering target-date funds based solely on a participant's age, sponsors want options that take into account such factors as gender, salary and savings rates, she said. "You have to understand the unique demographics, whether it be from a target-date fund or white labeling or retirement income," she said.

Beyond retirement

Robert Austin, the Charlotte, N.C.-based director of research for Alight Solutions, said he has noticed more employers thinking about helping employees outside the confines of retirement accounts because multiple factors — such as student loans and debt management — have an impact on participants' overall financial wellness.

Sponsors are looking for data solutions to customize and improve participants' savings, he said. Variables other than just age are necessary to create a better picture, said Mr. Austin, citing risk tolerance and family savings as just some of the factors.

"There are many pieces to the puzzle to see how you invest to produce a more individualized report" about participants' needs, he said.

Several interviewees detected an expanded interest by sponsors in health savings accounts. HSAs are tax-advantaged savings accounts linked to high-deductible health plans. HSAs offer a triple tax advantage: Contributions to the HSA are made with pretax dollars; earnings and interest within the HSA accumulate tax free; and withdrawals for qualified medical expenses are tax free.

DC consultant Martin Schmidt said more clients are exploring ways to integrate HSAs into overall retirement savings strategies. Although half of his clientsdon't offer high-deductible plans, HSAs represent "the first inning of a nine-inning ball game," he said.

"Sponsors need more education for participants that this is an investment account as well as a health-care account," said Mr. Schmidt.

He doesn't forecast dramatic changes in 2018 regarding the investment components of HSAs. However, as record keepers get more involved in HSAs — either offering their own or becoming a partner with an HSA specialist — the adoption rate should increase, he said.

Total HSA assets are expected to reach $44.7 billion this year, of which $7.3 billion are investments, according to Devenir Group LLC, Minneapolis, an investment adviser and consultant in the HSA business.


As for action in 2018, Ms. Brown of American Funds predicts more sponsors will "auto-everything at higher amounts." That means higher initial deferral rates, larger auto features caps — combining auto enrollment and auto escalation — on participants' accounts, and auto re-enrollments of participants who opted out of the plans.

"Eventually, re-enrollment can be done every year," said Ms. Brown, noting it takes "time and energy" for plans to conduct their first re-enrollment and that yearly re-enrollments will become more common. "Plans that did it three or four or five years ago are starting to do it again," she said.

Auto features are "certainly on everyone's radar," said Douglas Balsam, a principal and director of institutional consulting for DiMeo Schneider & Associates, Chicago. He said a "good number" of clients have raised their initial deferral rates to 6% from 3% of annual pay. When combined with auto escalation, the clients' auto-features cap have moved to the 10% to 12% range of annual pay, he said.

Some client holdouts on auto features are reconsidering because they have seen their peers' success with this approach, added Mr. Volo of Cammack Retirement. "Those who said 'it's not for us' a few years ago are visiting it now," he said.