Employers around the world are pushing free transparency and seeking better investment outcomes for their workers, which is leading to a greater availability of low-cost investment options in employer-sponsored plans.

“There is growing recognition that there must be more of a shared responsibility around retirement outcomes, beginning with the level of DC plan contributions,” according to a recent report on DC and DB plan trends from Vanguard.

Seventy-one percent of the 90 multinational companies that responded to the survey planned to increase their contributions to their defined contribution plan either dramatically or somewhat. Sixty-six percent said they prefer to use target-date funds as their plan’s default investment option, but actual adoption is lagging, especially outside of the United States.

Vanguard found that off-the-shelf TDFs have been a huge success, with nearly two-thirds of respondents using them for their U.S. DC plans and another 13% using custom TDFs. For those plans that are outside of the U.S., 30% of respondents said they use off-the-shelf or custom TDFs. Structural and regulatory differences outside of the U.S. have slowed the adoption rate around the world, Vanguard found.

Also see: Choose TDF first, then recordkeeper

“Sponsors are recognizing that they need to do more to help their employees make wise investment choices, and target-date funds are an ideal vehicle to do so,” says Steve Utkus, head of Vanguard’s Center for Retirement Research.

More than half of employers are using a mix of active and passive strategies in their default fund structure. Another 38% prefer all-passive default funds, Vanguard found. Only 5% said they would prefer an all-active lineup in their default option.

“We were a bit surprised, frankly, that passive-only default funds did not emerge as more of a preference, as our experience suggests that more sponsors are recognizing the advantages that come with passive strategies, including lower costs and the elimination of manager risk from the outcome. In contrast to the survey results, the marketplace trend indicates that passive-only defaults will grow over time,” he said.

Also see: The failure of fee disclosure regulations

Fee transparency has been top of mind for the past couple of years with more employers choosing low-cost service and investment options rather than a bundled service approach in which the plan administrator and the investment manager are the same and the fees are lumped into one asset-based fee, according to Vanguard.

“The push for fee transparency will continue, leading to structural changes for DC plans, including more unbundling of services and greater use of passive mandates, especially in default options, which will lead to lower overall plan costs,” Utkus believes.

Companies that manage both defined benefit pension plans and defined contribution plans struggle for adequate resources to manage them, the survey found.

Also see: DB plan liabilities outpace asset growth

“DB plans soak up significant time and effort while the growth in DC plans is an additional demand on sponsors,” according to Vanguard. Employers will continue de-risking and liability matching in DB asset management with an increased focus on cost reduction.

Paula Aven Gladych is a freelance writer based in Denver, Colorado.

Register or login for access to this item and much more

All Employee Benefit Adviser content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access