The retirement market has changed considerably over the past four decades. In 1975, 18% of all retirement assets were participant driven, according to the Investment Company Institute. In 2015, that number more than tripled to 59% — split nearly evenly between defined contribution plans and IRAs.
“The retirement market — while it is maturing — it is going through a number of transformational trends, especially in the 401(k) segment,” says John Alshefski, senior vice president and managing director of SEI's investment manager services division.
Still, 77% of assets in the DC market are in large plans, those with $50 million or more. But these assets account for less than 2% of all plans, according to PLANSPONSOR’s 2015 recordkeeping survey. An overwhelming majority, 95%, are in the under-$10 million plan size. “A small number of plans represent the most assets,” Alshefski says. “We see that trend changing.”
As the shift from DB to DC continues, individuals are taking on more responsibility for their retirement. Plan sponsors are also examining their strategy, says Robb Muse, senior vice president at SEI Trust Company. “With this increased emphasis on what it means to be a good fiduciary, plan sponsors are looking very seriously at what vehicles they are choosing,” he says.
Collective investment trusts are gaining traction. Large plan sponsors are moving beyond mutual funds and looking into collective trusts, Muse says. Operationally, the two look similar, however, collective trusts — which are only available to qualified retirement plans — typically have lower costs and CITs are exempt from some regulatory requirements, he says.
Collective trusts aren’t limited to the mega and large market, small-market plan sponsors are also getting exposure to this vehicle, Muse says. “We see these products working their way down market,” he says.
Heightened fiduciary discussion
This year, there’s been a heightened fiduciary discussion concerning risk and responsibility of plan sponsors, says Josh Cohen, head of institutional defined contribution at Russell Investments. Much of that is due to continued class-action lawsuits concerning the Department of Labor’s fee disclosure rules — and a related Supreme Court decision (Tibble v. Edison International).
Plan sponsors have taken two approaches in response to the recent litigation, Cohen says. Some have reacted by going “all passive” and opting for the lowest cost possible, he says. However, Cohen cautions, this might not be as safe an option as plan sponsors think — it might reduce fees but could expose participants to other risks, especially if interest rates increase. “You shouldn’t be making decisions based on what you think is best for you,” he says.
Plan sponsors are also asking for more help, Cohen says. Seeking high-quality solutions, sponsors are moving away from a retail branded approach and shifting to a streamlined menu with white-labeled options — and they’re looking for fiduciary partners, he says.
The continued evolution of qualified default investment alternatives is an area to keep an eye on, Cohen says. Target-date funds have been the vehicle of choice. “It’s been a great innovation for the industry,” he says.
Going forward, QDIAs need to include a mix of both active and passive management, as well as customization, Cohen says. Using technology to gather more information about participants can allow for more customized allocations that can adapt to an individual’s unique situation, he says. Allocations can be based on specifics, such as amount already saved, and not solely based on age, Cohen says.
The small-group market is utilizing technology to manage human capital on one integrated platform, says Craig Howell, vice president of business development at Ubiquity Retirement + Savings. This technology is now affordable for small employers, and it helps drive adoption of retirement plans, he says. “It has to be integrated and it has to be digital.”
The advent of the Internet is also responsible for driving prices down, Howell says. Access to information has made consumers more educated, and the cost of recordkeeping and investment advice will continue to decrease, he says. “We are definitely seeing pricing compression.”
Retirement crisis awareness
Many Americans don’t have enough savings to retire — a problem that’s beginning to be addressed, as evidence of solutions such as President Obama’s MyRA program, which launched nationwide in November.
“It’s finally being recognized,” says Tim Slavin, senior vice president of defined contribution at Broadridge Financial Solutions. Not only are people starting to think more about retirement, they’re also concerned with overall financial wellness, he says. “Retirement is not a standalone dialogue.”
Communication methods are also adapting. Retirement is being discussed via social media, videos and electronic tools such as Dropbox, Slavin says. Behaviors are changing and engagement is increasing, he says. “It’s all being driven by technology.”
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