Administration November 19, 2014

Emerging and Growing Trends in DC Plans

A survey from Towers Watson reveals some emerging and growing trends in defined contribution plan design, investments, fees and communications.
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More employers are offering participants the opportunity to save on an after-tax basis, according to the Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey. Fifty-four percent of companies offer Roth features in their 401(k) or 403(b) plans, up from 46% in 2012. Additionally, 18% of respondents are planning or considering adding Roth features by 2016. Of those that currently offer Roth, 45% also allow other after-tax contributions.

Changes to health savings account (HSA) and defined contribution (DC) plan contribution levels are an emerging trend, Towers Watson says. Twenty-three percent of employers that offer DC and HSA plans intend to increase their total contributions toward these plans over the next two to three years.

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However, there is room for improvement in integrating HSA and DC contributions, which offers employees tax efficiency, according to the firm. Nearly every company (99%) sets DC and HSA contributions independently. Of those that offer HSAs, only one in five (19%) specifically educate their workers about the wealth accumulation benefits of saving in both plans.

The survey results show the evolution of investment offerings has come full circle since the inception of DC plans. The first plans generally offered a few diversified choices, but over time, many organizations offered an overwhelming number of options. Today, employers are streamlining the number of investment options they offer to employees.

More than two in five (43%) companies have streamlined their investment offerings in the last five years with a strong bias toward continuing to decrease options in the next 12 months. Three-quarters (74%) of plans currently maintain fewer than 20 options, with the majority offering between 10 and 19 investment choices.

The vast majority of companies (79%) offer a combination of active and passive options throughout their portfolios. Approximately one in 10 offer either active-only or passive-only choices. Towers Watson says the understanding that active management efficiency is better achieved through multi-manager structures is growing. Participant use of single, stand-alone options has been inefficient, and 40% of companies recognize that combining investment strategies is more effective.

One emerging trend for investment lineups is custom target-date funds (TDFs). Unbundling the key decision points enables employers to align the glide path, portfolio construction and fund implementation to their plan objectives and participant demographics. Half of companies (49%) say they see the value of a custom TDF series and either have implemented one or may explore the option.

The survey finds outsourcing of investment services is gaining traction. One-third of respondents are either already in an outsourced DC solution or have expressed interest in delegating all or a portion of their plan oversight, with smaller plans more interested in outsourcing than their larger counterparts.

Regarding fees, 40% of survey respondents calculate and charge an asset-based fee based on the performance of the investment funds, while 32% charge a fixed dollar amount per member. Fifteen percent have a mix, where some recordkeeping fees are calculated as a fixed dollar amount per member and the remainder is charged as an asset-based fee netted from the performance of funds.

Towers Watson finds that since 2009, the percentage of companies requiring employees to pay direct recordkeeping fees has risen from 33% in 2009 to nearly 60% passing the full cost on to participants today. Only 23% of employers absorb the cost themselves.

The firm notes that increased use of technology opens the door for new ways to build participant engagement and increase the likelihood they will take action. However, using technology without a strategy for implementation, measuring results and refining the process does not guarantee it will result in participant engagement and behavior change. To increase the likelihood of effectiveness, Towers Watson suggests plan sponsors’ communication strategies should be based on data that provide a thorough understanding of all participants and what motivates their behavior.

One approach the firm says employers are using to gain knowledge of their participants and design communication campaigns is micro-segmentation, which leverages data to identify communication preferences, buying habits and other behavioral tendencies. Data can also be used to deliver content that is timelier and more relevant, reaching employees when they are most likely to act, such as after a life event or transition to a different life stage.

Armed with this knowledge, employers are able to use the right technology in more targeted ways to reach participants more effectively, such as through gamification, online contests and questionnaires, mobile apps and electronic bulletin boards. According to Towers Watson, when used strategically, the increased accessibility and low cost of mobile apps, gamification methods and other technology solutions offer plan sponsors new ways to reach employees and more alternatives for helping them make better, more informed financial decisions.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets.

The survey report may be downloaded from here.

Administration November 19, 2014

Plan Sponsors Should Optimize Retirement Readiness Efforts

More than three-quarters of large and midsize U.S. employers that sponsor 401(k) and 403(b) defined contribution (DC) plans say retirement readiness has become a major issue for their employees.
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A survey by Towers Watson shows a vast majority of plan sponsors have taken steps to boost employee retirement readiness through improved plan designs and communications. However, not all plan sponsors are optimizing these strategies. For example, more than two-thirds of companies (68%) offer automatic enrollment to at least some of their workers, but far fewer (26%) automatically re-enroll non-contributors or those deferring less than the default amount. Towers Watson says employers have the opportunity to engage slow or stagnant savers by using re-enrollment.

Similarly, 54% of companies provide automatic escalation, but only 28% mandate it. Among sponsors that automatically enroll some or all workers, approximately two-thirds offer automatic escalation of contributions, with 35% making it truly automatic.

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Aside from automatic enrollment and automatic escalation, the appeal of an employer match continues to be one of the single largest influencers of the amount and level of employee savings, according to Towers Watson. The Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey found 95% of plan sponsors offer a matching contribution to some or all of their workers. One-third of employees save at the match threshold and another one-third save more than the threshold. Knowing that many employees tend to save at the match threshold provides the opportunity for employers to reshape the match to encourage increased levels of savings and improved retirement readiness, Towers Watson says.

Fifty-four percent of companies offer Roth features in their plans, up from 46% in 2012, according to the survey. Additionally, 18% of respondents are planning or considering adding Roth features by 2016. Of those that currently offer Roth, 45% also allow other after-tax contributions. While this option has increased, utilization still remains very low, with only 8% of highly compensated employees and 11% of non-highly compensated employees using Roth options for savings. Towers Watson suggests that organizations that want to be proactive about driving up the use of their Roth provisions should target messages to employees not currently making Roth contributions.

Similarly, the survey shows a majority (59%) of companies offer a health savings account (HSA) as part of their account-based health plans, but only one-third (32%) of eligible employees are taking advantage of this option, with higher enrollment rates reported by companies with larger assets. Making the effort to increase employee awareness and understanding of available HSA accounts can be worthwhile if employers want to ease concerns about affording health care in retirement, advance the mark on retirement readiness and offer tax advantages. Also, incentives, such as an employer HSA contribution, can drive employee savings.

Towers Watson notes that fees affect employees’ ability to be ready for retirement. When employees are required to pay fees, they are taken directly from participant account balances, so the higher the fees, the less employees have in the market. Over time, the impact can be sizable. The firm says adoption of a fee policy is a good practice and can be one component of optimal plan management. According to the survey, most employers have conducted a high-value fee benchmarking study in the last three years, leading nearly half (48%) to reduce administrative fees and 34% to reduce investment expenses.

Survey results show employers rely heavily on traditional, passive communication methods (e.g., account statements, newsletters, group meetings, online education, webcasts) and that those methods of communicating with and educating employees are not working. Only 12% of respondents say employees know how much to save, and only 20% say employees feel comfortable making investment decisions. Less than 10% of survey respondents use mobile apps extensively or have tried “gamification,” which uses game design to motivate employees to achieve savings goals.

However, employers are showing signs that they are ready to make a more substantial investment in communications, with 84% reporting that they expect to increase efforts to educate employees on saving and investing over the next two or three years. More importantly, 78% say they will increase their use of technology to deliver information to employees over that same time period.

Towers Watson says plan sponsors should take steps to analyze their DC plan provisions with results in mind. This will broaden their considerations to include related health care factors and help them make decisions based on what is appropriate for their plans, given the unique needs of their employee demographics. Plan sponsors should also regularly measure the effectiveness of their DC plans based on how well the plan is helping employees meet their saving goals. This involves looking beyond participation, deferral rates and asset allocations, the firm says.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets.

The survey report may be downloaded from here. 

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