Executive summary:
- We anticipate that by 2030, U.S. defined contribution (DC) plans will include more automatic features, including auto enrollment and auto escalation.
- We believe that the DC plans of 2030 will increasingly include strategies that focus on retirement income.
- We expect that in 2030, plan sponsors will offer participants greater levels of personalized default options, including managed accounts.
- Alternative asset classes, potentially including private markets, are likely to become more integrated into DC plans by 2030.
Will 2030 DC plans perform better at preparing U.S. workers for retirement?
To date, many U.S. defined contribution (DC) plans are not fully succeeding. This creates greater reliance on Social Security, which these days feels about as solid as a gust of wind. Workers may have to work longer, but that comes with its own set of workplace issues. Are DC plan sponsors growing more or less clear on their core mission? The last time we wrote about this topic, a 2020 survey showed that 93% of plan sponsors agreed they should be responsible for the retirement preparedness of their employees. A recent survey showed that 99% of plan sponsors today feel responsible for helping their employees generate income in retirement.1
In late 2023, we saw IBM redirect matching contributions from its 401(k) plan to its defined benefit (DB) pension plan. Do we think this will be a growing trend? Probably not to that extreme, but we do see best-practice DC plans taking some lessons from pensions. Two areas we’ll discuss here include a trend toward a more automated approach toward contributions—such as opt-out plans and aggressive auto contribution escalators—and greater consideration of including private market (PM) strategies, primarily through target date funds and other multi-asset funds. PM exposure has been part of institutional investing for many years. We hope that trend continues in the DC space.
So then, what do plan sponsors need to change, between now and 2030, to give their participants the best chance of retirement success?
1. 2030 plan sponsors will need their three main policies to be rock solid.
Funding policy. Investment policy. Spending policy. If a DC plan gets these three things right, and then lives by them, successful outcomes for participants are much more likely to happen.
Funding policy: A funding policy is really about funding future liabilities. But unlike a corporate pension plan, where the liability is owned by the corporation, the liability—the unfunded retirement—is held by the individual employee. We know that the performance of the investment portfolio is only one part of funding retirement. The main driver is always the contribution level. A funding policy helps to ensure that those contributions are happening at a level appropriate to ensure success. Because a well-funded retirement requires consistent and sustained contributions.
A smart funding policy understands the power of participant inertia. Another way to say this: Employees are better investors when you make the choices for them. Opt-out plans work drastically better than opt-in plans. Auto enrollment, with reasonable entry levels, combined with auto-escalation—with fast-moving increases and contribution ceilings as high as 15-20%—works better still. As the constantly growing body of evidence continues to tip the scales, we believe that 2030 plans will include more of these automatic features. We hope that high automatic contribution levels—which may make some employers and employees uncomfortable right now—will feel normalized by then.
Investment policy: An investment policy outlines a plan’s investment objectives and details how its investments will be managed. It helps lay the foundation of an organization’s overall governance structure by ensuring that all fiduciaries fulfill their obligations. It provides guidance on the establishment of a core investment menu and QDIA (qualified default investment alternative).
Most DC plan sponsors have read countless studies that show how having too many investment options typically leads to poor investment decisions by participants. If a committee’s objective is to successfully lead participants to well-funded retirements, then we believe its primary duty is to provide limited choices—all of which create a high likelihood of a successful outcome.
Collapsing and consolidating options doesn’t mean you need to remove diversification. As a plan fiduciary, you may like the large cap growth, core and value funds in your plan, and participants would certainly benefit from both the opportunity to diversify and access to quality managers with different investment styles.
Most investment committees for large defined contribution plans have embraced multi-manager structures for years but plans of all sizes are now evaluating this as an alternative to single manager portfolios. Part of the rationale for this interest is that managers focus on different areas of the market, and diversifying among managers within one solution can provide a smoother ride for plan participants. Exposing participants to the idiosyncratic risk of a single manager is best avoided by building a multi-manager fund.
Sidenote: Four years ago, we predicted that by 2025, we would see a more prominent focus on environmental, social and governance factors in investment policies. That issue has proven hard to predict. Our view is that in 2030, the focus will continue to be primarily on policies that allow for optimized investment performance and risk management, with a clear focus on generating dependable, retirement income.
Spending policy: The primary focus for DC plans has been on accumulating assets. But we believe plans need to think about how they help participants manage spending in retirement, as retirement income is the real goal of a DC plan. After all, running out of money is one of the greatest fears—financial or otherwise—for U.S. citizens. With Social Security as the only source of guaranteed income—and that guarantee feels less certain than ever—trying to determine how to convert retirement savings into consistent income is critical.
But the inclusion of investment options specifically designed to manage that decumulation phase is not widespread. A thorough, disciplined spending policy can make a plan truly best-in-class. As part of that policy, committees should consider the inclusion of investment strategies designed to assist participants in managing their spending in retirement, including both guaranteed and non-guaranteed options. This will give employees the confidence to avoid delaying retirement and will allow employers to better deal with workforce management issues. We believe we’ll see the growing inclusion of these strategies by 2030.
2. 2030 DC plans will need better governance to help with plan success and stave off litigation.
Litigation is an issue plan sponsors face, particularly those with large defined contribution plans. The wording of most lawsuits states that the plan failed to operate in the best interest of plan participants. This wording hangs like a sword over the head of every plan sponsor. That threat is unlikely to go away by 2030. Eliminating all litigation risk and fiduciary responsibility isn’t possible. But there are steps that can be taken to mitigate that risk, such as regular fee benchmarking, operating in compliance with the plan document and investment policy statement, and ongoing monitoring of plan investment options. This process will only be successful with the firm foundation of a strong governance process.
Aside from reducing litigation risks, improving governance can also increase portfolio performance. Why? Because governance enhances discipline and consistency—hallmarks of good investing. So then, an important initial step in the process of updating governance is to establish formal investment beliefs and objectives for the plan, and then consistently and meticulously stay true to those beliefs. This approach is considered a core factor in global best-practice models, fundamental to improved governance, and is utilized by many of the largest plans in the world. Establishing investment beliefs saves time and allows committees to focus more on managing fiduciary risks, along with strategies to improve retirement outcomes for participants.
3. 2030 DC plans will need to clearly delegate investment decision making.
Since 2019, we’ve seen the MEPs-and-PEPs trend work to solve this delegation issue for smaller companies. The passage of the 2019 SECURE Act allows the companies to band together and participate in a single plan, known as either a Pooled Employer Plan (PEP) or a Multiple Employer Plan (MEP). This approach can be a valid option for small employers, as it increases their purchasing power, creates fee efficiencies, and provides more comprehensive services.
That said, MEPS and PEPS have their limitations. As we move toward solutions that are more complex and more customized, MEPS and PEPS are built with limited options. For plans with more than the simplest needs, we believe organizations need either an internal subcommittee—for those with sufficient resources—or an outsourced chief investment officer (OCIO) solution.
The problem with committees is that they’re typically staffed by executives with competing priorities. Investment committee membership is not their day job. They have limited capacity to focus on the organization’s retirement plans. To mitigate the workforce management risk and maximize the probability that participants won’t need to delay retirement, committees for larger DC plans should reevaluate how they spend their time and consider partnering with an OCIO provider. Similar to a MEP or PEP, the sponsor has responsibility for selection and monitoring of the OCIO provider, but they maintain the flexibility of managing the plan as their own, without having to convert to a new recordkeeper. And a best-in-class OCIO provider can help ensure the plan intersects the unique needs of the firm with the most advanced investment options and practices available, all while rigorously keeping an eye on regulatory changes.
4. In 2030, alternatives and potentially private markets will finally be part of DC plans—through a multi-asset approach.
The growth in allocations to private markets seems to be happening everywhere except DC plans. Corporate DB plans, especially those that are seeking growth, have significantly raised their PM allocations. DC plans, on the other hand, are drastically trailing, despite the potential for greater returns. While portfolio liquidity to accommodate daily transactions is a factor that must be considered, the most likely cause of this missed opportunity is due to fear of litigation. There have been a number of headline-grabbing stories—including lawsuits that were fought all the way to the Supreme Court—due to a plan’s exposure to alternative investments. Meanwhile, PM exposure in other institutional-investing spaces, such as DB plans, healthcare, and non-profits, continues to grow.
The solution doesn’t have to be that complicated. A multi-asset fund or a target date fund can easily add in exposure to private equity, private credit, private real estate, and unlisted infrastructure. And the complex liquidity management can be handled by the manager of the fund. Yes, the plan sponsor still has fiduciary responsibility for selecting the fund, but the complexity of day-to-day management all but disappears. And they provide their participant with access to one of the largest and fastest growing investment opportunities.
5. 2030 plan sponsors will need to offer their participants greater levels of personalized default options.
Today, target date funds are still the Qualified Default Investment Alternative (QDIA) chosen by most plan sponsors. But TDFs are based on averages, as opposed to specific investor characteristics. TDFs do well at simplifying decisions but do poorly at aligning solutions to individual situations.
Alternatively, a managed account provides a greater level of customization and includes advice on both the savings level and investment allocation designed to put the participant on the path to fully fund their retirement. Just like funding and investing policies for pension plans are unique to each sponsor, in order to reach successful outcomes many DC participants would likely benefit from more comprehensive and personalized advice. Right now, according to the latest study by the Plan Sponsor Council of America, managed accounts are the QDIA exception, instead of the rule. A significant headwind for greater utilization of managed accounts are the incremental fees. Over a full career, when younger participants aren’t typically engaged, it may be difficult to justify this additional expense. It’s possible, or even probable, that by 2030 artificial intelligence (AI) may be leveraged to overcome issues created by lack of participant engagement.
A hybrid QDIA which includes target date funds for early-career employees, combined with a secondary-QDIA event to move participants to managed accounts as they near retirement and become more engaged, is an interesting strategy. There are also a number of managers that have come to market or are exploring a personalized TDF strategy that is intended to create a more customized allocation than offered in a single TDF vintage.
We hope, that by 2030, personalized QDIAs are a more typical default option.
6. 2030 plan sponsors will need to be more efficient at plan implementation.
Every institutional investor is under pressure to reduce fees. Implementation—defined as trading strategies executed by a third-party manager to mitigate costs and unintended risks—is one key way to help reduce those fees. Any asset movement in a DC plan can have serious implications if risks and costs are not carefully managed with thoughtful implementation. In DC plans, implementation comes in many forms, including transitioning assets from one manager to another, centralized investment implementation of multi-manager portfolios, or an implementation account within a TDF to improve the trading efficiency of rebalance and roll-down.
By 2030, more DC plans will use implementation specialists. Because they represent a natural extension of the current focus on fees and costs, the pitfalls of relying on money managers to transition assets between mandates are becoming more apparent, as DC plans move away from mutual funds to more institutional structures. Efficient investment implementation reduces turnover and trading costs, keeps participants fully invested in the capital markets and avoids blackout dates and performance holidays commonly associated with transitions in DC plans today.
7. 2030 plan sponsors need to take a data-driven approach to the funded status of participants.
DB plan sponsors are good at measuring their success, using the simple tool known as funded status. A funded status takes a full-bodied look at the liabilities of a plan—the future spending needs—and ensures the assets are sufficient to fund those needs. The same approach should be used by DC plans. Is it on track to fund the future liabilities of the participants?
Unfortunately, too many plans measure success based on participation rates against industry averages. But participation does not guarantee successful retirement income.
DC plan sponsors should periodically conduct retirement readiness studies to look at the funded statuses of their collective participants. We believe this is the most accurate measure of a plan’s success or shortcomings. Therefore, it is particularly important to establish this baseline prior to implementing investment or plan design changes, to accurately measure the impact of those decisions.
8. 2030 plan sponsors will need to develop an understanding of the generational differences among participants
For most of their careers, participants spend as much or more time planning vacations or even choosing a cellphone than they do thinking about their retirement. Likely as a result, behavioral economics support the premise that participants look to their employer to tell them what to do through plan design. That’s one of the reasons we have advocated in this article for sponsors to optimize their plan’s auto features, and for committees to continue to reevaluate their core menus and ensure the plan’s QDIA is aligned both with demographics and their investment beliefs.
Although a majority of participants overall are concerned about outliving their retirement assets, and many don’t feel they are on track for retirement, immediate priorities differ by generation. Younger generations such as Gen Z and Millennials often carry student loan and credit card debt, and indicate they are more likely to stay with their employer if they matched student loan payments to the retirement plan. Gen X and Baby Boomers generally aren’t comfortable calculating how much spending they will have in retirement, and both believe plans should prioritize strategies to help manage spending in retirement.
Beyond these differing priorities, there are even differences in preferred mediums of communication. In all cases it’s important to remember that employees prefer simplicity and do not respond positively to industry jargon, but it’s also important to know your audience. Those in the Tik Tok generations, such as Gen Z and Millennials, prefer on-demand videos, podcasts or text messages, while Baby Boomers overwhelmingly want one-on-one in-person meetings.
The bottom line
DC plans have made strides since they began. Great strides? Questionable. The original sales pitch was that these plans would shift responsibility from employers to workers and take the place of pensions in funding worker retirements. DC plans succeeded in shifting responsibility. But there is still a long way to go before they prove their success at funding retirements. The list in this article provides a starting roadmap on how to achieve that success. DC plan participants should be clear on their mission: providing dependable retirement income. Then they should build a clear strategy on how to achieve—and measure against—that goal.
1 Source: 2024 BlackRock Read on Retirement
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