Broader focus coming to bear on total retirement readiness

In the defined contribution arena, the new year is expected to be one of financial wellness as plan executives look for ways to educate participants and evaluate their retirement readiness based on more than just their 401(k) or other DC plan accounts.

DC consultants say this broader view of financial health is something plan executives can do without waiting for Congress to act. The challenge, they say, is developing effective communications as well as ways to measure the success of encouraging participants to plan for the future.

“There will be an accelerated pace of financial wellness as plan sponsors think in a more holistic way,” said Alison Borland, vice president of retirement strategy and solutions for Aon Hewitt, Lincolnshire, Ill. “Much more energy will be focused on education and communication.”

Previously, sponsors said participants' overall financial wellness — such as health-care spending, Social Security and taxable savings — “was not really their responsibility,” she said. “That has changed. There's a dramatic shift in sponsors' attitudes.”

Now, sponsors are offering more seminars, more access to financial advice and more web-based methods for participants to assess how all aspects of their lives prepare them for an adequate retirement, she said.

“We anticipate an elevated focus on retirement readiness for DC participants and how sponsors evaluate the success of DC plans,” said Lorie Latham, a Chicago-based director at Towers Watson & Co. She added that providers and sponsors will devote more attention to ways “to evaluate successful retirement outcomes and sufficient income replacement ratios.”

In recent years, executives of the DC plan clients of Martin Schmidt have devoted most of their attention to health-care issues. “Now, they are moving more to a greater consideration and greater interest in holistic financial well-being,” said Mr. Schmidt, principal and client services director at HS2 Solutions, Chicago, a retirement plan and technology consulting firm. Clients are integrating evaluations of health-care costs with retirement balances and other income sources, as well as using web-based systems to help participants calculate their spending strategies in retirement, he said.

Several consultants predicted more consolidation of record keepers in 2015, although perhaps not as extensive as the fusing of the record-keeping units of Putnam Investments, Great-West Financial and J.P. Morgan Asset Management to create Empower Retirement, now the second largest record keeper — behind Fidelity Investments, Boston — in terms of assets and participants.

“Consolidation is tied to greater fee transparency, which is driving record keepers towards greater open architecture” in offering investment products, said Jacob O'Shaughnessy, an adviser at Arnerich Massena Inc. in Portland, Ore. “Those that can thrive in this environment will be the winners.”

Mr. O'Shaughnessy said some record keepers were “caught off guard” by the Department of Labor fee-disclosure rules that took effect in mid-2012.

“I expect more consolidation because it's hard to make a buck if you are a small record keeper without economies of scale,” he said. “The market was oversaturated.”

The pressure on fees and the need for greater economies of scale “will weed out the weaker players” among record keepers, Mr. Schmidt added. “It will be good for the marketplace.”

Total plan costs will remain an important factor in 2015, although they won't carry the impact of the overall reductions for sponsors as was the case just before and just after the enactment of the fee-disclosure rules, said Ross Bremen, a partner at NEPC LLC, Boston.

In NEPC's annual survey of 24 record keepers representing 113 sponsors, plan fees was the sponsors' top priority. Although the rate of decline in fees has diminished in recent years, Mr. Bremen said some DC plans “have been more proactive than others” by moving away from revenue-sharing and switching to institutional-priced or lower-priced shares.

As DC executives try to cut costs, they also are trying to adjust their investment lineups. In recent years, the median number of investment options has remained stable, according to the NEPC surveys. However, “we don't expect sponsors to sit still in 2015,” Mr. Bremen said That means sponsors will continue to review their lineups, determining, for example, the mix of passive and active management options or the use of alternatives.

Investment menu review is high on the list of predictions for Ms. Borland of Aon Hewitt. As sponsors try to trim their core menus, “they are trying to build in more sophistication and keep it simple,” she said.

Such an approach includes the offering of white-label options enabling sponsors “to focus less on an investment manager name and more on asset class and strategy,” Ms. Borland said. “It's less about fees and more about diversification.”

Target-date funds will be the subject of greater review by sponsors, said Jennifer Flodin, DC practice leader and senior consultant at Plan Sponsor Advisors, a Chicago-based division of Pavilion Advisory Group Inc. “Target-date funds will become more complex under the hood as investment managers look to add other asset classes,” she said. Possibilities include global bonds and alternatives, such as hedge funds, as components of the target-date funds.

She doesn't expect a big increase in the use of custom target-date funds. “They are complex with a lot of moving parts,” she said. “The industry talks about them more than sponsors are interested in them.”

For many DC plans, executives will look to providers offering off-the-shelf target-date fund series that provide non-proprietary investment choices and flexibility for adjusting the glidepath at retirement so sponsors can avoid a custom solution, she said.

Company stock will be under greater review next year in part due to the Supreme Court's June ruling that employee stock ownership plans and other DC plans no longer enjoy a presumption of prudence in offering employer stock as an investment option. In the case of Fifth Third Bancorp et al. vs. Dudenhoeffer et al., the court struck down a defense often used successfully by companies when they were sued by participants claiming a breach of fiduciary duty when company stock prices fell.

Experts said the case likely will do more to discourage DC plans from adding company stock than it will encourage companies to drop company stock from their investment menus.

The court's ruling means company stock “will be like any other investment” that requires monitoring to meet a plan's fiduciary duties, said Julie Stapel, a Chicago-based partner at law firm Morgan, Lewis & Bockius LLP. “A few of our clients are thinking about eliminating company stock, but that's not the primary way people are reacting.”

Ms. Stapel said — and DC consultants agree — that some plan executives had been taking actions prior to the court decision, such as putting a limit on how much company stock participants could hold in their accounts or freezing a corporate match contribution made in company stock.

“These are helpful in a risk-mitigation perspective, but the central challenge is how your fiduciary process will deal with company stock” in light of the court's decision, she said. “The biggest thing that needs to happen is that the consultants and financial advisers need to set up a process to monitor company stock.”