In the early weeks of 2024, plan sponsors are asking themselves "what now?" They've had a year to digest the opportunities and challenges provided by the industry-changing SECURE Act 2.0 legislation, and with several provisions becoming effective, we should see significant movement over the year. However, defined contribution (DC) plan sponsors and fiduciaries also face substantial headwinds, such as cost management pressures, balancing change and limited resources and ongoing litigation risk. Finding the right balance between the different opportunities and challenges is daunting.
We asked four of our DC plan experts to discuss these topics and provide insight into what they see in the market. Dave Amendola, senior director and intellectual capital leader for benefits advisory and compliance, David O’Meara, senior director and head of DC investment strategy, Emily Phillips, director and northeast investments leader, and Holly Tardif, director of retirement, share their thoughts about current trends in the industry and how to tackle mounting pressure from all sides.
Q: How do you see your clients’ approach to securing their employees’ financial futures changing?
Dave Amendola: The SECURE Act 2.0 package provides employers with a prime opportunity to use their DC plan to impact employees’ financial resilience meaningfully. Positive changes can be made through new withdrawal opportunities, such as to cover emergency expenses, support domestic abuse victims and purchase long-term care insurance. One of the most impactful opportunities is likely student loan retirement matching contributions, which employers have been looking at seriously for the last five years and had been waiting for the legislative relief that SECURE Act 2.0 provided.
2024 is going to be a real inflection point regarding adoption of many of the new provisions. There will likely be staggered implementation for some of these opportunities due to cost challenges and recordkeeper readiness, but they have more opportunities now.
Although more and more employers have been looking at DC plans in this light, some clients philosophically don't believe the DC plan should be a vehicle for employees to address short-term financial needs. They think it could negatively affect an employee’s long-term retirement readiness. However, I think that providing employees with flexibility to address financial precarity in the short term while still incentivizing them to utilize the plan to maximize retirement savings is a significant opportunity to help employees prepare for retirement.
“With the recent legislation, the question now becomes, how do clients integrate financial resilience or wellbeing programs broadly and communicate them to participants?”
David O’Meara | Senior Director, Investments
David O’Meara: Building on Dave’s comments about the purpose of a DC plan – the purpose of a defined contribution plan now is far broader than it was ever intended to be. Originally meant to be a supplemental savings plan, it's now the primary savings vehicle and source of retirement income for many employees. With the recent legislation and options Dave laid out, the question now becomes, how do clients integrate financial resilience or wellbeing programs broadly and communicate them to participants? Do we add that flexibility inside the plan? Or do we try to do it outside the plan?
Emily Phillips: Those are great questions, David. The defined contribution industry has been trying to fit financial wellbeing and resilience inside the DC plan, but it might not optimally reside there depending on the organization and its unique needs. We think of financial resilience as a much broader issue, with the DC plan potentially a significant component of an organization’s support program. Ultimately, we want to incentivize people to keep putting money into their plans so they benefit from compounding investment returns and the scale employer plans can provide with respect to lower costs.
Dave Amendola: David and Emily, your point about whether to incorporate financial wellbeing and resilience solutions within a DC plan is a salient one. A good example is the pension-linked emergency savings account (PLESA) provision in the SECURE 2.0 legislation. In theory, it's an attractive concept, but the lack of clarity around how the PLESA would work in practice seemed to blunt enthusiasm about this opportunity last year. Both the Internal Revenue Service and Department of Labor recently issued helpful guidance; it will be interesting to see how plan sponsors and fiduciaries will react to the guidance and whether they now believe that they can comfortably integrate the PLESA into a defined contribution plan.
Many out-of-plan emergency savings account offerings have come onto the market over the last few years. It will be interesting to see how this specific kind of tool develops. It may be that the PLESA has too many implementation issues to make it a reality. It could be that out-of-plan solutions prove to be more attractive for certain plan sponsors. Whether the PLESA in-plan option gains significant traction or not, its availability should prompt plan sponsors to think critically about whether they want to implement an emergency savings account and, if so, where that benefit should reside in the broader umbrella of a benefits package.
Holly Tardif: Taking in these perspectives, let’s take a step back and look at the plan sponsor’s role. We know that employers want to improve participant outcomes, but there are an overwhelming number of options for sponsors to evaluate. We also know that some features or services may be inaccessible to some employers based on their plan size or vendors. A possible alternative for employers to consider is outsourcing these decisions – enter the pooled employer plan, or PEP. A benefit of PEPs is that a professional fiduciary takes on the lift of vetting the different plan design options. PEPs also provide a scaled, cost-effective way to innovate and deliver features such as those that promote financial resilience.
Q: Considering the current business environment, are clients optimizing resources?
Dave Amendola: There are tremendous challenges facing employers right now. Our recent survey: Elevating benefits to improve market position and program efficiency asked “What are the top three key issues that are influencing your benefit strategy right now?” The number one key influencing issue, with 80% of respondents including it in their top three, was competition for talent. Not at all surprising given that we've seen that challenge for so many employers over the last few years.
The second key issue influencing benefit strategy, with two-thirds of respondents including it in their top three, was rising costs. I don't think that would have made the top three in the past, even as recently as a year ago. Finally, the third concern was diversity, equity and inclusion.
“Employers must utilize all the tools at their disposal to help employees prepare for retirement and understand the potential long-term impact of their short-term decisions.”
Dave Amendola | Senior Director, Retirement
These three key issues reflect the inherent tension in what many organizations are experiencing. On one hand, they want to utilize their DC plan to support their talent objectives and they have more opportunities than ever to do so. On the other hand, so many organizations right now are really challenged to manage costs efficiently and optimize resources with competing priorities. Employers must utilize all the tools at their disposal to help employees prepare for retirement and understand the potential long-term impact of their short-term decisions. For example, utilizing dynamic data analytics tools can help employers understand and model the potential impact of these plan design decisions on their employees and their program costs.
Holly Tardif: Picking up on a point that Dave made – organizations have competing priorities. Recognizing this, many plan sponsors are taking a hard look at where they truly add value to their DC plan – especially considering the effort and risk involved. Sponsors are exploring ways to mitigate fiduciary risk, reduce administrative effort and lower plan costs. With the passage of the SECURE Act, pooled employer plans (PEPs) offer a new way to deliver 401(k) benefits. In a PEP, most plan responsibilities that currently fall to the employer are shifted to an independent professional fiduciary — easing the burden of plan sponsorship. This concept has been gaining interest among employers in the current environment because it can be a win-win for both plan sponsors and employees.
Q: How are you working with plan sponsors to help them navigate the continuing threat of lawsuits related to investment fees?
David O’Meara: First, we’re taking some basic steps that potentially help make plans unattractive to litigants. One of these steps is ensuring that plan participants pay the lowest possible fee for any given investment. This does not mean fees before anything else, but rather ensuring that the plan is offering the lowest cost share class and vehicle of the investment funds offered by the plan. This is an ongoing process, as often a plan can become eligible for a lower cost share class upon reaching a particular asset threshold.
Additionally, establishing and adhering to strong plan governance processes is crucial, including an investment policy statement (IPS), meeting minutes, annual governance calendar and maintaining a record of analyses prepared for plan committees such as annual fund or fee reviews. Be sure to document as much detail as you deem appropriate and follow the procedures you have outlined in your IPS closely. When procedures and guidelines are documented and heeded, you are less attractive to a plaintiff’s attorney.
The primary sources of information for plaintiffs’ bar come from publicly available information (i.e., Form 5500 filings or participant fee disclosures). In most cases, it requires only a cursory review within public filings to ensure fiduciaries are fulfilling their duties to the fullest and following best practices.
Consistent fiduciary training must also be part of the process. Committees experience turnover and scheduled training is beneficial. Following guidelines, adhering to established processes and documenting the process places fiduciaries in very good standing even if litigation occurs.
Dave Amendola: What I’d love to get your thoughts on, then, David or Emily, is this: do you think that because of the ongoing challenges associated with these lawsuits fiduciaries are scared away from taking risks or being innovative with the investment options offered by a plan, possibly to the detriment of plan participants?
Emily Phillips: Generally, yes, the ongoing challenges and the specter of potential litigation has made fiduciaries less innovative in nature. The due diligence process is fraught with risk and doing something innovative may immediately bring the plan to the spotlight, and so it is naturally easier to be conservative when making changes and following what the market is doing.
However, we have found that most litigation does not come from plan sponsors being innovative. It’s typically connected to plans whose fiduciaries have failed to show that they are satisfying their basic responsibilities. For those that have been more innovative, demonstrating that they have satisfied a prudent fiduciary process and documented that process, we believe will put a plan sponsor in a stronger position when that litigation does arise. We’ve been discussing what that innovation may look like with a few of our clients.
Q: What are clients thinking about in terms of lifetime income?
Emily Phillips: Our clients often come to us and ask: “What should we be doing? What's available? What can we implement?” We take a step back and ask them what they want to provide and the role they’d like to take in providing that solution to participants. As Dave mentioned, each employer considers the role of the employer and the role of the DC plan differently. Some plan sponsors still see the role of the DC plan as primarily an accumulation vehicle, and that it's not the employer's responsibility to help transition that accumulated savings into an income stream. Others want to provide a secure retirement income and believe the DC plan is a piece of the solution.
“We think of financial resilience as a much broader issue, with the DC plan potentially a significant component of an organization’s support program.”
Emily Phillips | Director, Northeast Investments Leader
After considering the more philosophical questions related to lifetime income with an employer, we look to the current plan and where the client would like it to be regarding this “spectrum” of purpose. Often, there are easy steps with high impact, such as adding decumulation options like partial or systematic distributions. Far too many plans still restrict a participant’s distribution flexibility by requiring the participant to withdraw everything all at once in a single lump sum.
Allowing participants to stay invested in the plan post-employment and to draw out their savings over time at their discretion is an easy yet important first step for many plan sponsors. Other options include allowing participants to use plan assets to directly buy an annuity or another guaranteed income vehicle. There are solutions in the marketplace that facilitate participants making a one-time election of buying guaranteed income at the point of retirement, as opposed to having to roll assets outside the plan and then using a financial planner to do that.
David O’Meara: As Emily mentioned, taking a step back is key. Before employers can settle on what they want to provide and how they want to provide it, it’s critical that they understand their plan population. Do they have career employees or does their workforce consist primarily of short-term employees? Do their employees typically have multiple historical defined contribution plans or a defined benefit plan? The answers to these questions will go a long way in helping plan sponsors determine what types of decumulation options might best meet the needs of their DC plan participants.
Dave Amendola: Emily, I really like what you said about there being “easy” steps that plan sponsors can avail themselves of that can have substantial impact. When employers hear “lifetime income,” they almost immediately think of annuities. Many of these employers still have only the lump sum distribution option. However, partial distributions or other types of withdrawal options can be considered lifetime income provisions and can be a relatively easy way to provide plan participants with important flexibility with respect to decumulation of their retirement accounts. The options do not have to be overly cumbersome.
I would like to get your perspective on the availability of annuities embedded in a plans’ target date funds. These products have been a few years in development but haven’t really been adopted by the market materially yet. When do you think there will be at least opportunities for a critical mass of employers implementing an offering like this?
David O’Meara: Great question, Dave. We have been speaking with clients about lifetime income for over 10 years, but solutions have evolved very slowly. Some major products are slated to go live in 2024. Regardless, there are reasons for the slow development. Specifically, breaking down barriers between asset managers, insurance companies and recordkeepers and integrating the administration and data involved with these products. The ability to share confidential information across systems safely is critical as is how the employee experience is delivered.
“With the scale and efficiency brought by pooled employer plans, we expect robust and cost-effective solutions to develop that would otherwise be challenging to provide in a single employer approach.”
Holly Tardif | Director, Retirement
We’ve seen that plan sponsors need to help drive participant behavior. Just educating participants on options is not going to move the needle. Plan sponsors have the critical role to help show plan participants what their options are, show them the effects of their choices and help them truly make the right decision for themselves. Given the different stakeholders involved, it has proven difficult to package these services and deliver a seamless employee experience.
Holly, I'm curious about what role you think PEPs may play in the development of these types of "hybrid" lifetime income offerings.
Holly Tardif: David, you bring up a great question about the role of PEPs and the evolution of income solutions. With the scale and efficiency brought by PEPs, we expect robust and cost-effective solutions to develop that would otherwise be challenging to provide in a single employer approach – including the technical components and the participant experience wrapped around the solution. Lifetime income and broad retirement income solutions are good examples of the value PEPs bring to employers. As we’ve discussed, these are complex solutions for individual committees or plan fiduciaries to explore, but PEPs provide professional and institutional fiduciary oversight with the benefits of a scaled delivery platform.
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