Plans rank areas for improvement to drive better results

While defined contribution plan executives advocate changes in plan design and management, their words don't necessarily match their actions, according to a survey by consultant NEPC LLC and Pensions & Investments.

For example, the results for sponsors preparing qualified default investment alternatives to address the unique characteristics of individual plans were a "little surprising," said Ross Bremen, a partner at Boston-based NEPC and a principal author of the survey.

Even though they say comprehensive data is valuable, a number of sponsors aren't adequately using the data to develop their QDIAs. "This is an area where work needs to be done," Mr. Bremen said.

And when asked what is the best way to make sure participants don't outlive their assets, sponsors cited annuities or "other retirement income offerings" as their top choice — yet relatively few offer those options. "It was a little inconsistent that there was such high-concept support but so few use it," Mr. Bremen said.

The online survey of 169 employers with 220 DC plans — corporate, public, non-profit and union — was conducted from mid-August to mid-September. Among employers with DC plans, 52% also had defined benefit plans. Thirty-seven percent of the DC plans had assets of $1 billion or more; another 37% had assets of less than $100 million. The middle group ($100 million to $999 million) accounted for the rest.

As DC plan assets grow, Mr. Bremen said sponsors should be taking greater advantage of the opportunities afforded by the Pension Protection Act of 2006 to improve their plans, most notably in the use of target-date funds, managed accounts or balanced funds as QDIAs. "It's critical to look at demographics to make sure you have the proper QDIA," he said.

When asked about their QDIA selection process, 25% of surveyed plan executives said they didn't do a "deep dive" — a detailed use of plan participant data — to prepare the QDIA. Another 21% only looked at demographics once when the QDIA was established.

On the plus side, 43% said they reviewed plan demographics periodically to check on changes in the workforce, the survey said. Eleven percent of plans lacked a QDIA, but some of those are non-ERISA plans.

When looking at plan size, the survey found that 48% of the largest plans ($1 billion or more in assets) reviewed plan demographics periodically. Midsize plans ($100 million to $999 million) had a 49% rate, and the smallest plans (less than $100 million) had a 35% rate.

However, the largest plans had the worst no-deep-dive results (28%) vs. the midsize plans (20%) and the smallest plans (24%).

When all plan executives were asked which demographic variables they chose establishing a QDIA, 61% cited participants' age, followed by participants' savings rate (38%), participants' wages (36%) and participants' plan balances (29%) among nine choices. Only 6% selected gender — the lowest rated factor. Multiple answers were allowed. The largest plans were the most likely to consider a broad range of demographic factors in selecting a QDIA, the survey said.

Despite their limited use of data for QDIA development, many sponsors expressed faith in the value of "big data," which the survey defines as accumulated data "that is too large and complex for processing by traditional database management tools."

Among all sponsors, 35% said big data can lead to better outcomes for participants by allowing more personalized communication. Another 19% said big data will help managed account programs become more personalized.

However, 46% said big data wouldn't lead to better outcomes for three reasons: They doubted the information could be sufficiently personalized; they believed participants' wealth was too fragmented; and they feared any benefits would be offset by cybersecurity threats.

The largest plans were the most optimistic about big data leading to better outcomes. Forty-eight percent said communication would be more personalized and 19% said managed accounts would be more personalized.

For the midsize plans, the respective positive responses were 34% and 15%. For the smallest plans, the respective responses were 23% and 25%.

"Because of big data, managed accounts can be more effective," Mr. Bremen said. "Sponsors hope that big data will take plan solutions to the next level."

However, managed accounts ranked low on several survey questions gauging sponsors' use of — or interest in — them. "Sponsors have tried to offer managed accounts and engage participants, but the takeup rate has not been significant," Mr. Bremen said. "Most participants don't provide enough information for personalization."

When asked what features they offer "to address post-retirement challenges," sponsors from all plans placed managed accounts sixth among seven choices. Many plans offer several features, and multiple responses were allowed.

For all plans, managed accounts at 43% trailed such features as allowing former participants to stay in the plan (88%), offering online tools and education programs (81%), and providing one-on-one financial counseling (61%).

Plan executives also were asked what is the best way to help participants make "appropriate investment decisions." Among all plans, managed accounts ranked sixth of seven choices. The most popular choices among all plans were target-date funds as a QDIA and the availability of one-on-one investment advisers.

Managed accounts also were not among the top choices when plan executives were asked to name the one feature that should be required of all DC plans. Among all plans, managed accounts placed eighth of nine choices. The most popular were auto enrollment of all employees and one-on-one financial education.

Another area where words and actions didn't match was retirement income strategies — fashioning DC plans to help participants and retirees have sufficient resources in retirement.

When asked what is the best way sponsors can make sure participants don't outlive their assets, the top answer among all plans (42%) was an annuity or "other retirement income offerings." Auto features (33%) placed second and none of the other three choices received more than 12%.

Annuities were the top choice of large plan executives (55% of respondents) and small plan sponsors (37%). Auto features was the top choice (41%) of midsize plan executives with annuities placing second (29%).

However, when executives were asked what investment options they offer to address longevity risk, in-plan annuities placed a distant fourth among all plans (with 17% of respondents) out of seven choices as well as fourth for each plan size segment.

The survey offered mixed results about sponsors' goals for "retirement income solutions," a description that was left intentionally open-ended, Mr. Bremen said.

When executives of all plans were asked if they would they have an in-plan solution in the next five years, 48% said no, 35% said yes and 17% said they already had one. Mr. Bremen said he was encouraged by the 35% group.

The largest plans had the highest rate of in-plan solutions now, the highest rate for adding something within five years and the lowest rate of not having an in-plan option.

The survey also pointed out that sponsors said cybersecurity is low on the list of concerns for both participants and for plan executives. Among nine choices for what plan sponsors think are the biggest concerns facing participants, cybersecurity ranked eighth for all plans and for each plan size.

"Sponsors deal with things on a daily basis, and they haven't felt the pain from data breaches — at least not yet," Mr. Bremen said. The results "suggest that record keepers have done a pretty good job of protecting against cyberthreats."

Among the survey's other findings for all plans:

• Sponsors across all asset sizes said the top concerns by participants among nine choices were failing to contribute enough for retirement, longevity risk and market risk.

Given 10 choices, sponsors of all plans said their primary concerns were lack of sufficient participation and/or low savings rates, followed by plan fees, litigation risk and plan administration burdens. Lawsuits ranked second in importance for the largest plans; fees ranked second for the midsize plans and lack of financial literacy ranked second for the smallest plans.