Retiree income major concern for DC plan execs

Adding a retirement income solution to defined contribution plans is at the top of the wish lists of both plan executives and other industry members, and they also agree that the biggest impediment to achieving that goal is the lack of more definitive regulatory guidelines, a new survey shows.

These findings and others are part of a wide-ranging discussion of DC plan problems and solutions in a survey conducted by Rocaton Investment Advisors LLC, Norwalk, Conn., and Pensions & Investments.

Sponsors, investment consultants, record keepers and asset managers also weighed in on the role of fees, the construction of investment menus and the use of custom target-date portfolios.

Seeking ways to improve retirement income opportunities, respondents wrestled with matching desire with reality.

When asked if they could change one thing about their plans, 24% of DC plan executives cited including a retirement income solution. Adding or improving auto features was the second choice (21%) and reducing fees (17%) placed third.

When asked the same question about DC plans in general, 28% of DC industry members cited adding a retirement income solution, with 21% recommending the addition or enhancement of auto features and 12% advocating re-enrollment.

“We were surprised that across different constituencies, they were aligned in regard to retirement income solutions,” said Jeri Savage, a Rocaton partner in charge of defined contribution research.

“They're interested in having it, but they highlighted the need for more regulations,” added Christopher Lyon, a Rocaton partner.

In addition to 64% of plan executives waiting for clearer fiduciary protection from the Department of Labor, 36% said they were waiting for more retirement-income products “to mature and gain broader adoption.” These were the two biggest barriers to taking action cited by sponsors.

Among other DC industry members, 57% cited more regulatory protection as the biggest barrier, while 40% referenced the need for products to mature and gain greater acceptance and 32% cited the lack of portability — the uncertainty that participants who leave one plan with a retirement income solution can have it transferred to another plan.

“We've had product innovation but not an appetite for adoption,” Mr. Lyon said. “It's been a more difficult road than many people expected.”

DC plan consultants and providers often have remarked that sponsors remain uncomfortable about the ability of existing regulations to insulate them from lawsuits if they added an in-plan retirement income option. Although some large DC plans have adopted such products, the request for more DOL rules has been a constant theme.

“Sponsors are reluctant to act,” Mr. Lyon said. “They have heard from their consultants, their counsels and record keepers that there isn't enough” fiduciary protection.

“People want something akin to the QDIA (qualified default investment alternative) for target-date funds,” said Ms. Savage, referring to comments from industry members over the years.

And when given a choice for what single piece of regulation was needed for plan management, the retirement income safe harbor was cited first among DC plan executives (21%) and first among other DC industry members (23%).

Fees produced a complex set of answers by sponsors.

When asked what three things keep them up at night, the reasonableness of fees ranked 7th among DC plan executives. Yet when asked about their three most important priorities over the next 12 months, “addressing fees” placed second.

Mr. Lyon suggested that the difference in responses was due to sponsors having initiated efforts to reduce fees, but also due to their continuing fee vigilance.

Fees represented a greater concern for non-sponsors. When asked what kept them up at night, “continued pressure on fees” tied for second with “impact of new regulations.” (Overall retirement adequacy placed first). The survey didn't seek details, but Mr. Lyon speculated that the non-sponsors' comments about fees related to their profit margins.

In a series of questions on investment management, 27% of DC plan executives said they had reduced the number of investment options in the past two years, although they weren't asked to quantify the amount. Another 4% said they planned to trim the lineup, while 69% said they hadn't cut the number of options.

Thirty-eight percent of DC plan executives said they offer 11 to 15 options, with a target-date series being counted as one option. The same percentage for the same number of options was cited by other DC industry members as the most appropriate number of plan options.

However, DC plan executives favored offering more options than DC experts deemed appropriate. Twenty-eight percent of plan executives said they offered 16 to 20 options, and 17% said they offered more than 20. By contrast, 14% of DC industry members said 16 to 20 options were appropriate, while only 5% favored more than 20.

The dichotomy between what sponsors provide and what non-sponsors recommend isn't surprising, Ms. Savage said. The latter response is “consistent with the overall industry push to streamline” investment menus, she said. Sponsors tend to support more options because participants push back when presented with a smaller menu.

Because off-the-shelf target-date funds have become commonplace, Rocaton and P&I decided to check industry views about custom target-date series. Thirty-one percent of DC plan executives said they already offered one. However, 42% said it was very unlikely or somewhat unlikely that they would offer one in the next two years.

Plan size made a big difference. Among plans with more than $5 billion in assets, 52% of executives said they offered a custom target-date portfolio while 24% of executives at plans with less than $500 million in assets offered this option. Among plans with $500 million to $5 billion in assets, 22% of executives said they offered a custom target-date portfolio.

Among the survey's other findings:

• Due to rule changes by the Securities and Exchange Commission affecting prime money-market funds, 50% of plan executives said they expected those options to be replaced by government/Treasury money market funds, and 35% predicted the plans would switch to stable value funds. Among other industry members, 56% forecast a switch to government/Treasury money market funds and 50% predicted a move to stable value.

• Eighty percent of DC plan executives and 83% of other DC industry members said sponsors would be “less likely” to offer company stock as an option in the future. Mr. Lyon said he interpreted the response as meaning plans without a company-stock option wouldn't offer one and plans with such an option may consider eliminating it.

• Sixty-eight percent of DC plan executives said they would not work with an adviser who isn't a fiduciary. Fourteen percent said they weren't sure, while 18% said they would.

The online survey, conducted in October, contained 416 responses — 36% from DC plan executives and 64% from investment consultants, record keepers and asset managers. Industry professionals expressed their personal views, rather than the views of their companies.