DC Plan Sponsors Are Focusing on Long-Term Retirement Objectives

A recent T. Rowe Price report uncovers how defined contribution (DC) plan sponsors are evolving their views of certain retirement-related risks and objectives.  

According to the survey, “Advancing the Way We Think About Retirement Risk and Outcomes,” the largest concern among plan sponsors includes participants’ longevity risk (with 42% of plan sponsors indicating this as their top worry), and the capacity to gain greater retirement account balances over the long term, when selecting target-date strategies or other qualified default investment alternatives (QDIAs) for participants.

During the selection process for QDIAs, the survey found DC plan sponsors prioritize risks towards long-term objectives. However, small DC plan sponsors have a higher sensitivity towards short-term objectives.

Thirty-five percent of plan sponsors said “reducing point-in-time downside return” is their top consideration when selecting a QDIA. Yet, 65% of respondents believe scoring the highest retirement income opportunity is a greater priority.   

“Being an effective plan sponsor today requires an expansive view of the risks and influences on the growth of a participant’s portfolio,” says Lorie Latham, senior defined contribution strategist at T. Rowe Price. “This survey reveals that plan sponsors clearly understand that longevity risk–the risk that participants will outlive their retirement income–is a critical factor in determining retirement readiness, and that their investment choices must be designed accordingly.”

Additionally, the risk of unfavorable sequence of returns (SoR) was cited as a reason for favoring lower equity target-date allocations among plan sponsors, the survey finds. However, T. Rowe Price says these findings suggest plan sponsors “consider risk in a broader context,” including the possibility that a “lower equity target date glide path may fail to provide sufficient growth needed for participants to accumulate adequate savings for retirement.”

Sixty-four percent of plan sponsors disagreed with the statement that “there are no unintended consequences in attempting to mitigate sequence of return risk for participants.” Therefore, the survey finds plan sponsors understand the risks associated with lessening SoR risk via asset allocation.

“We often see plan decisions that overemphasize point-in-time metrics, focus on a specific subset of participants, or anchor to a worst-case scenario,” says Wyatt Lee, CFA, co-portfolio manager, Retirement Date Strategies. “The intent may be to identify the right solution for a heterogeneous DC plan population, but it’s really important to keep the full population top of mind and to maintain a long-term view to help participants achieve the retirement outcomes they are hoping for.”