'Auto everything' to continue as providers move focus to 'right levels' of participation
As defined contribution plan industry members look ahead to 2019, they forecast enhanced versions of existing practices will be at the top of to-do lists for plan sponsors, providers and consultants.
A prime example is automatic enrollment, where the sponsors' goal has gone beyond encouraging participants to simply contribute. The goal now — and in the future — is to encourage participants to contribute more for initial deferrals and to contribute more overall via auto enrollment and auto escalation.
Among record-keeping clients of T. Rowe Price Group Inc., for example, the most common initial deferral rate is now 6% of annual pay rather than the so-called traditional 3%, said Aimee DeCamillo, head of retirement plan services for Baltimore-based T. Rowe Price. The firm saw improvement in deferral rates in 2018 and "we'll see it next year," she said.
The latest data show 32.4% of clients using the 6% deferral rate vs. 31.9% setting the 3% rate. Another 14.7% have a 4% rate, while 13% have a 5% rate. A handful of clients (1.1%) have rates higher than 6%, while the rest (6.9%) have rates below 3%.
Ms. DeCamillo and other sources were asked what the industry can do without the assistance or interference of Congress, state legislatures, regulators or litigators.
"Auto everything will continue," said Sue Walton, Chicago-based senior defined contribution strategist for Capital Group Cos. "Six percent will be the new starting point" for auto-enrollment annual salary deferrals.
She also forecast that more companies will use auto escalation to encourage participants to eventually put as much as 15% of annual pay into their retirement accounts. "Companies see that auto features better drive results," she said.
Ms. Walton said getting participants to save more is only part of the goal. "The measure of success has changed," she said. "You not only need participation, you need participation at the right levels." This means making sure participants are investing appropriately, according to their needs and circumstances, as well as planning how to effectively spend in retirement so they don't outlive their assets.
Changing economic climate
Predictions of market volatility will encourage sponsors to re-evaluate investment lineups, giving actively managed funds a closer look.
"A return to normal volatility will determine how well passive investments will hold up," said James Veneruso, Summit, N.J.-based senior vice president and defined contribution consultant at Callan LLC.
"For the previous 10 years, boring was beautiful," said Mr. Veneruso, referring to a bull market that encouraged sponsors to increase their offering of index equity funds. "For the next 10 years, we'll see how actively managed investments are considered."
An increasingly volatile market "will provide an opportunity for active to get more of a review," said Capital Group's Ms. Walton.
Market volatility also will prompt sponsors to re-evaluate target-date funds "to see how well they will hold up," she said.
Mr. Veneruso said his firm asks clients if they want to "renew their vows" with their current target-date fund. "Is the target-date right for them? Is the current provider providing the right target-date fund?"
Consultants expect sponsors to further evaluate the role of target-date funds to see if some participants would benefit more from managed accounts or hybrids of managed accounts and target-date funds.
These analyses will be based in part on a greater use of data as sponsors try to tailor their plan designs to reflect participant demographics.
Sponsors "will continue to invest in making QDIA (qualified default investment alternatives) more personalized," said Alison Borland, the San Francisco-based executive vice president for defined contribution at Alight Solutions.
Jacob O'Shaughnessy, Portland, Ore.- based managing director at SageView Advisory Group LLC, predicted greater participant interest in personalized retirement planning will benefit providers of managed accounts. More products are entering the market, which is "good news for participants" because it means more choices and greater competition on fees, he said.
Consultant Robyn Credico said participants will put more assets for investing into health savings accounts. "Several vendors have created fully integrated solutions," said Ms. Credico, the Arlington, Va.-based defined contribution consulting leader for Willis Towers Watson PLC, referring to programs offered by Fidelity Investments, Empower Retirement and Vanguard Group. "We'll see more interest" among large record keepers, she added.
Malvern, Pa.-based Vanguard, for example, announced in November a partnership with HealthEquity Inc., an HSA custodian for $7 billion in assets. Vanguard participants who save in a HealthEquity account can integrate the HSA information with their 401(k) balance and other information to get a broader view of their retirement savings.
'Great tool for savings'
"HSAs are a great tool for savings," said Tina Wilson, head of investment solutions innovation and product management at Massachusetts Mutual Life Insurance Co., Springfield, Mass. "There is a tremendous opportunity for the (retirement) industry to educate people on HSAs' role."
Education includes making sure participants know the difference between HSAs and flexible spending accounts as well as highlighting the investment opportunities of HSAs, she said.
HSA assets totaled $51.4 billion as of June 30, according to Devenir Group LLC, an HSA research and consulting firm. Of the total HSA assets, an estimated $9.8 billion, or 19%, represented investment assets.
Devenir predicted total HSA assets would reach $54 billion by the end of 2018, of which $10.9 billion, or 20.2%. would be investment assets, according to an August report based on reports by the 100 largest HSA providers.
All of the predicted changes and enhancements in plan designs and investment menus are enveloped by two continuing trends — making communications clearer and simpler, and incorporating retirement planning/saving as part of financial wellness.
"We need to capture their attention and give them a road map," Ms. Wilson said. That means incorporating retirement savings into a participant's overall financial picture such as paying car loans, preparing a college savings strategy, balancing a budget and paying for health care, she said.
Plans need to provide "vital information in the shortest format," said Cindy Rehmeier, president of the National Association of Government Defined Contribution Administrators. "Simplification is where plans are headed."
More education also is needed to help participants "translate account balances into retirement income," said Ms. Rehmeier, manager of defined contribution plans for the Missouri State Employees' Retirement System, Jefferson City, with assets of about $2.2 billion. "Financial wellness is always at the forefront."