Data and Research January 19, 2018

Unbundled Plans Gained Significant Ground in 2017

Today, just 8.8% of “mega plans” with assets greater than $1 billion utilize a fully bundled structure.

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Callan has published its 2018 DC Survey, offering up a highly detailed overview of the U.S. defined contribution (DC) plan industry.

The extensive analysis covers a broad range of topics, including a section on the topic of “bundled versus unbundled” plan arrangements. As the research lays out, the proportion of plans that are at least partially bundled fell dramatically from 53.8% in 2016 to 44.0% in 2017, a continuation of the unbundling trend.

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“In 2010, 65.1% of plans reported that their plan was at least partially bundled,” Callan says.

Today, just 8.8% of “mega plans” with assets greater than $1 billion utilize a fully bundled structure. Underscoring the strong influence of plan size in this area, nearly two thirds (62.5%) of mid-sized plans with asset levels between $100 million and $500 million report using a partially bundled structure, while approximately a fifth indicating they currently utilize a fully bundled structure (21.9%).

To be clear, according to Callan’s definitions, in fully bundled plans the recordkeeper and trustee are the same entity, and all of the investment funds are managed by the recordkeeper. Partially bundled plans also have the recordkeeper and trustee as the same entity, but not all of the investment funds are managed by the recordkeeper. Finally, in fully unbundled plans, the recordkeeper and trustee are independent of one another, and none of the investment funds are managed by the recordkeeper.

Regardless of how they interact with these key providers, most DC plans—including both ERISA-governed plans and those voluntarily seeking to follow the Employee Retirement Income Security Act (ERISA)—seek to be in compliance with ERISA section 404(c).

“Notably, the number of plan sponsors that do not know if their plan is compliant dropped considerably—from 12.6% in 2016 to 2.2% in 2017,” Callan confirms. “Most DC plan sponsors (84.9%) said they took steps within the past 12 months to ensure compliance—up slightly from 2016 (81.4%). More than six in 10 (60.5%) personally reviewed compliance. Many engaged third parties to review 404(c) compliance, such as their consultant (50.0%) and their attorney (40.7%).”

While the number that did not know what steps had been taken to ensure compliance rose from 9.3% in 2016 to 11.6% in 2017, Callan notes fewer plan sponsors had taken no steps to ensure compliance (9.3% in 2016 versus 3.5% in 2017).

Opinions January 19, 2018

5 Actions to Elevate Your Defined Contribution Plan in 2018

Toni Brown, senior vice president, Retirement Strategy, Capital Group, says a plan sponsor with a clearly defined objective for its defined contribution (DC) plan will be better positioned to make all subsequent decisions.

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While unpredictable factors can always arise that influence defined contribution (DC) plans, we expect industry-leading plan sponsors will align their efforts this year with several particular trends and themes. Based on these trends and themes, Capital Group’s retirement strategy team, identified five actions plan sponsors can take in 2018 to truly elevate their DC plans:

 

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1)  Define the plan’s objective. It’s surprising how many company retirement plans, even some larger ones, lack a clear and defined objective. DC plans used to be supplemental savings plans but now are primary retirement plans. Plan sponsors are starting to ask themselves questions such as:

  •    What is the fundamental objective of the plan?
  •    Who is the plan serving, and how will it help these employees accomplish their goals?
  •    Is this the sole retirement savings plan?

 

Objective-setting conversations should cover topics such as: the role of the DC plan and interaction with other benefit plans—such as a defined benefit (DB) plan—and in what way does the DC plan serve employees? For many plan sponsors, the DC plan is now their sole retirement plan. This may suggest an objective of: “A plan that serves employees throughout their working career and post-retirement to achieve and maintain a successful retirement.” A plan sponsor with a clearly defined objective for its DC plan will be better positioned to make all subsequent decisions.

 

2)  Consider the options and impact of “auto” everything. More and more corporations are embracing automatic features, which shift employees into an appropriate retirement savings vehicle. But the trend toward automation, or even “DB-ization,” is just beginning. We expect more companies will adopt auto-features that push more participants into retirement savings plans, raise levels of contribution and guide employees to appropriate investment funds. If you’re not already auto-enrolling employees annually, it may be time to start. We expect more conversations about auto-escalation and investment re-enrollment as companies grow increasingly comfortable with a more proactive approach to DC plans.

 

3)  Optimize investment structure. Simplification is a topic that has been gaining steam for a while but now seems to be catching on, especially among mega plans. The benefits of offering many investment options makes sense on the surface, but multiple options can cause indecision, which keeps employees from making good, or any, investment decisions for their retirement assets. In 2018, we believe we’ll see top-tier companies focusing on offering fewer, broader investment options, renaming options for ease of choice, and encouraging use of their qualified default investment alternative (QDIA). Simplification will be key.

 

4)  Add a post-retirement tier. Ten thousand Baby Boomers retire every day in the U.S., according to Pew Research Center and the Social Security Administration (SSA). With so many new Boomers entering the retirement phase of investing each year, post-retirement income was a major industry theme last year. In 2018, expect to see companies take action, by adding a post-retirement tier to their investment structure. This tier would consist of options managed for withdrawals—i.e., investments that are liquid, portable and, importantly, understandable.

 

5)  Measurement matters. With increased transparency in the industry and more information available to investors and employers than ever before, measuring the impact of your plan, today, is the key to its success. To elevate your DC plan in 2018, tie results to plan objectives, keep it simple and meaningful, and focus where you can have the most impact.

 

 

Toni Brown, CFA, senior vice president, Retirement Strategy, Capital Group

 

 

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.

 

Securities offered through American Funds Distributors, Inc.

 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.

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