Defined Contribution Retirement: Expanding Opportunities for Employees

COVID-19 has increased the need for employers to provide financial wellness to employees and sales and implementation support for plan providers. Technology investments that provide managerial insight into plan participation and offer “next best” actions to plan participants are vital for plan providers to win and retain business. 

Product Trends 

Index, target-date, and lifestyle funds have become standard components of many plans. 

Plan sponsors continue to pursue funds with lower fees, such as low-cost passive funds or index funds. Technology also enables active investing to generate alpha and supports an ongoing trend of more private market investments. Plan sponsors and participants are interested in lower fees. Plan sponsors also want to mitigate the growing number of court cases alleging fiduciary breaches by plan sponsors due to excessive plan fees. These court cases are no longer limited to large employers. 

The popularity of managed accounts and automated advice continues to grow. Some firms offer qualified default investment alternatives (QDIAs) that shift participant funds from target-date funds to managed accounts based on predetermined criteria such as attained age, years in service, or years until retirement. Collective investment trusts are another alternative to mutual funds for qualified retirement plans, offering lower costs and fewer regulatory requirements. The percentage of large DC retirement plan assets in collective investment trusts continues to grow. 

The Impact of COVID-19 

Plan sponsors, especially larger plan sponsors, have focused on offering additional participant services, education, and increased communications for plan participants. An ongoing trend towards considering employees’ overall financial wellness beyond retirement has accelerated. 

The SEC has warned of bad actors encouraging plan participants to withdraw funds from their 401(k) plans or IRA and place those funds in riskier investments. The general trend of increased data breaches and fraud during the pandemic has led plan sponsors to pursue fraud protection and IT security measures. 

Various sources reported that plan sponsors, especially smaller plan sponsors, suspended 401(k) matching of contributions at the outset of the pandemic in early 2020. Many sponsors have since restored matching contributions or plan to do so. 

On the participant side, there is an ongoing increase in early retirements or employees quitting their jobs, the so-called Great Resignation. Many plan participants withdrew funds from their IRAs and 401(k) plans and plan to save more or postpone retirement and work longer. 

Younger baby boomers taking early retirement could create new and different retention and investment opportunities for plan sponsors and asset managers. It could also create new opportunities for savvy investment managers as plan participants consolidate assets from multiple DC retirement plans accumulated over their working lives. 

M&A Activity 

Organic growth remains important, but insurers should also be aware of the potential for acquiring books of business by consolidating recordkeepers. Providers should improve post-consolidation service and support experiences to prevent plan sponsors from leaving. Effective recordkeeping consolidation can allow insurers to scale more rapidly.  

The recent MassMutual and Prudential deals show that even large insurers may decide to exit the market, possibly due to the heavy customization required for large plans. T. Rowe Price and Vanguard both outsourced management of their core recordkeeping operations and related IT services to Fidelity National Information Services (FIS) and Infosys, respectively. It remains to be seen whether insurers will follow suit. 

Independent broker-dealers and RIAs are also feeling pressure to consolidate, driven by aging workforces, compliance costs, and efficiency concerns, among other factors. 

Regulatory Trends 

Thirteen states have established or mandated state-run retirement plan programs as of June 2021. The SEC and several states have proposed best interest regulations, which apply to retirement plan rollovers. Some form of the Department of Labor’s (DOL) regulation is anticipated to return. 

The DOL eased the formation of multi-employer 401(k) retirement plans. The new rule would enable employers in different industries but the same state or metro area, or similar employers in different parts of the country, to form multi-employer plans. The rule aims to allow more small businesses to offer retirement plans to employees and negotiate lower fee terms with combined purchasing power. 

The proposed SECURE 2.0 Act would automatically enroll eligible employees in 401(k), 403(b), and SIMPLE plans. It would enable 403(b) plans to invest in collective investment trusts and participate in multiple employer plans. Additionally, it would establish a national database of lost retirement accounts, increase the age for required minimum distributions, and remove investment caps on qualifying longevity annuity contracts, among other provisions. The act is running out of time for passage and could be taken up in 2022 instead. 

Cybersecurity questions are now a standard component of DOL Employee Benefits Security Administration (EBSA) plan audits, following DOL issuance of best practices for plan fiduciaries, participants, sponsors, and recordkeepers in April 2021. 

Fintech and Insuretech 

Aite-Novarica Group has found in discussions with insurers that they are willing to investigate ways to work with fintech and insuretech firms. Still, it is challenging for them to find startups with platforms that can provide experiences and support for different plan types.  

Most insurers are investing in insuretech firms that focus on retirement and retirement planning instead of acquiring them (as MassMutual acquired Blueprint Income), licensing their solutions, or partnering with them. Some fintech and insuretech firms may compete with insurers as plan providers. 

Technology Priorities 

DC retirement plan providers continue to invest most heavily in case installation, distribution, customer engagement, and plan design to a lesser extent. Onboarding requires investments in digital capabilities, data and analytics, and core systems. Portal initiatives and communications continue to be vital.  

A focus on participant financial wellness across the board requires effective communications, reporting, and analytics. Plan sponsors are prioritizing improvements to participant contact center service and educational offerings. 

Read Aite-Novarica Group’s report Business and Technology Trends: Defined Contribution Retirement Plans for an in-depth look at the trends in this space. 

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