Shadow of pandemic over industry not fading yet

The defined contribution industry entered 2021 with a sense of constrained ambition but also with ideas about making permanent some changes necessitated by the coronavirus pandemic.

Many sponsors that developed plans in 2019 for implementation in 2020 put them on hold to deal with the pandemic's impact on the economy, their businesses and employees' health.

Their planning for 2021 will be governed by a number of uncertainties — the pandemic's strength, the vaccines' effectiveness and the prospects of more federal aid.

"The elephant in the room is the pandemic," said David Amendola, the Stamford, Conn.-based consultant and senior director in the benefits and adviser compliance practice of Willis Towers Watson PLC.

When P&I interviewed Mr. Amendola 12 months ago for his outlook regarding 2020, he reported a flood of inquiries from sponsors about using 401(k) plans as a vehicle to help employees pay down student loan debt, referring to the program announced in mid-2018 by Abbott Laboratories, Abbott Park, Ill.

"The interest level really hasn't waned," although sponsors devoted much of their time in 2020 to pandemic-related issues, he said. "I have started working with more clients in recent months. This could be a very significant event in 2021."

Mr. Amendola said the U.S. Department of Treasury and the IRS had been developing regulations to provide specific guidance on how employers could use 401(k) plans to help participants pay off student loans.

Abbott received a private letter ruling from the IRS to become the first employer to use this strategy. Although an Abbott executive told P&I last year that a private letter ruling wasn't necessary, the company wanted to make sure it had a regulatory blessing for its effort.

"A lot of clients want to wait for Treasury and the IRS for guidance," Mr. Amendola said. "We had expected guidance much, much earlier (in 2020). Without the coronavirus, I think we would have had guidance in the summer."

Consultant James Modelski predicts more action on specific financial wellness topics such as emergency savings, student debt management and overall savings strategies. "If sponsors don't want to go the Abbott route, they will provide guidance and reference resources to help employees," said the partner and senior consultant at DiMeo Schneider & Associates LLC, Chicago.

Mr. Modelski echoed the comments of several other interviewees that many sponsors who had suspended their employer match have reinstated them or will reinstate them in 2021.

A Willis Towers Watson survey of 464 sponsors published in December found that 73% that suspended or reduced the match in 2020 have brought them back or plan to reinstate them in 2021. The survey was based on responses collected in September.

Twenty-one percent have already reinstated matches. Sixty percent that reinstated them or plan to do so will provide the same match level.

The survey report noted that 66% of employers have added or are very interested in adding at least one innovative design feature to their DC plans, including employee rainy day funds backed by employee after-tax contributions. Among this group, 26% have instituted this service while 19% said they are extremely interested or very interested in adding it.

Many of Michael W. Kozemchak's clients that suspended their matches are reinstating them at previous levels, said the managing director of Institutional Investment Counseling, Bloomfield Hills, Mich.

He said record keepers are increasing their offerings of "ancillary products" to sponsors, such as debt management tools, student loan management services and loan consolidation programs.

"The goal of the record keepers is to deepen their relationships," he said. "They call it 'enhancements.' In reality, it's a cross-sell."

The clients of Martin Schmidt are "trying to get back to whatever one might call normal," said the DC plan consultant and principal at MAS Advisors, Chicago.

When P&I interviewed Mr. Schmidt in July for a midyear update on the pandemic's impact on DC plans, he said clients had put some existing practices and future plans on hold — such as suspending company matches, delaying a Roth option, delaying auto escalation and postponing reviews of vesting policies. For some clients, 2021 is what 2020 should have been, he said.

Clients that suspended the match will reinstate it as early as Jan. 1, he said. Some may enhance it as they compare their practice to peers. This year "will be a year they look at overall plan design," he said.

"The pattern for employers in 2021 will be less about offering more products and more about how to deliver the right product to the right person at the right time," said Andrew Frend, senior vice president for product and strategy in the employee benefits business of Voya Financial Inc.

Employers must "maximize the utility of what they are offering," said Mr. Frend, adding that improved communication is crucial. For example, employers must do a better job of educating participants about the health-care and investing attributes of health savings accounts, he said. "Employees aren't sure how their opportunities work," he said.

Mikaylee C. O'Connor said she noticed clients "were getting back to their agendas" during the second half of 2020. "It will be the same in 2021," said Ms. O'Connor, the New York-based senior consultant, principal and head of defined contribution solutions for RVK Inc.

However, "it may take them longer" to achieve their goals because the pandemic has forced executives and employees to work remotely.

Working remotely has enabled sponsors to evaluate how they conduct business, such as replacing live group meetings or live one-on-one sessions with participants with virtual ones.

"It may not work for everybody, but if it is just as effective and it reduces costs, that's a win-win," she said.

Technology will play a bigger role in defined contribution in 2021, said Alison Borland, San Francisco-based executive vice president of wealth solutions and strategy at Alight Solutions.

Plans will continue their "digital transformation," creating "easier, accessible and more personalized" ways for participants to learn about and manage their accounts.

An Alight survey, to be published in mid-January, said 77% of sponsors were very interested and 18% were moderately interested in offering to participants electronic disclosure information, thanks to a June 2020 Department of Labor safe harbor rule. The survey, conducted in the fall of 2020, featured responses of 116 employers with 5.5 million employees.