This article is part of our Retirement Plan Trends series, which explores issues affecting the retirement space.

What keeps defined contribution (DC) retirement plan sponsors awake at night? While improving participant outcomes and addressing retirement income needs are among their top priorities, sponsors say potential legislative changes, consolidation in the recordkeeping industry, market uncertainty, inflation, rising interest rates and litigation risk could all disrupt how they manage their plans over the next five years, a new Capital Group survey shows. Several sponsors also mentioned aging participants needing more advice. 

Top priorities for 2023

Capital Group surveyed 52 DC and defined benefit (DB) plan sponsors representing a variety of industries, asset levels and geographies (encompassing both public and private DC plans). About half of the sponsors oversee plans with assets of $5 billion or more. We also surveyed a sample of consultants to see how their priorities, recommendations and concerns compared to the plan sponsors we contacted.

DC plans: Top of the agenda for 2023 for most DC plans in the survey was improving participant outcomes, which for 52% of sponsors was among their top three choices. Participant engagement came next, followed by retirement income. The next-most popular choice was a tie between evaluating a target date series and conducting a participant demographic analysis.

DB plans: For DB plan sponsors, changes in regulatory or accounting requirements and interest rates were among frequently mentioned potential disruptors to their plans over the next five years, while their top priorities are implementing liability-driven investing, achieving fully funded status and addressing the impact of inflation.

DC plans’ top 3 priorities in the next 12 months

Source: Capital Group. Note: DC plan sponsors were asked to name the top three priorities for their plans. Each bar shows the percentage of sponsors who included each topic among their choices. Totals may not reconcile due to rounding. Based on survey responses collected from July 13, 2022, to December 1, 2022.

Consultants and sponsors differ on plan design

Although DC plan sponsors identified improving participant outcomes as their top priority, some still eschew certain auto-savings features that many consultants we contacted recommended. This was evident from our separate survey of 11 consultants.

Among the key contrasts:

• Auto-enrollment: While all surveyed consultants advise their DC clients to automatically enroll employees in the plan, only two out of three DC sponsors do so, typically when a participant is hired. Sponsors who do not auto-enroll cited various reasons. Some public DC plans pointed to legal prohibitions. Others cited the budget impact, and a belief that it is “too parental.” 
 
• Auto-escalation: All consultants advise DC clients to implement auto escalation — automatically raising participants’ contribution levels, usually annually, until they reach a predefined cap (typically 10%). But only 38% of the DC sponsors make use of auto escalation. Those that did, on average, capped escalation at 10%.

Contribution rates

Source: Capital Group. Totals may not reconcile due to rounding. Based on survey responses collected from July 13, 2022, to December 1, 2022.

• Investment re-enrollment: Nearly all consultants support investment re-enrollment, but just 15% of DC plan sponsors said they had conducted one. In an investment re-enrollment, a plan might sweep all participant assets into a default investment, such as a target date fund, except when a participant opts out and confirms their individual investment strategy. Re-enrollment can be an important tool to ensure that participants have an age-appropriate asset allocation.
 
• Retirement income: All consultants recommended offering a retirement income option, yet only one-third of DC sponsors said they did so in the survey. Although two in five DC plan sponsors saw retirement income as a top priority, the same proportion of respondents was not considering a retirement income solution at all. For those who were considering it, the most popular solutions were flexible income options (such as managed withdrawal), protected income (such as an annuity or other guarantee) and a target date series with flexible withdrawal components. Said one corporate plan sponsor with $5 billion in DC assets: “There will be significant retirements in the next five years. And the challenge will be to keep (those participants) in the plan and also make sure we meet their needs with respect to decumulation.” 
 
• Keeping retirees in the plan: Another area where sponsors and consultants tended to differ: whether to actively encourage participants to stay in the plan after they retire. That was the recommendation of most consultants. But less than one-third of sponsors said they were urging retirees to remain in the plan (although nearly all sponsors allowed retirees to stay if they wish). Some argue that keeping retirees in the plan creates greater economies of scale, which can lead to lower fees for both sponsors and participants.
 
• Environmental, social and governance (ESG): While reviewing investment managers’ use of ESG is a top priority for consultants over the coming year, just 21% of DC plan sponsors said they actively consider ESG factors when selecting an investment manager. And only 38% monitor investment managers for ESG progress. As one DC respondent said, “Managers should incorporate ESG factors into their security selection and proxy voting policies; however, there is no mandate to hold specific views.” It’s possible that some plan sponsors are not fully embracing ESG amid regulatory and political uncertainty.

With most retirement plan sponsors utilizing consultants and advisors to help them make decisions, the above outlines just some of the contrasts between advice and actual implementation in retirement plans. This was Capital Group’s first survey of the plan sponsor and consultant landscape, and we hope to continue to uncover these trends and strive to help plans better serve participants.

This is the most recent article in our Retirement Plan Trends series, which explores major issues affecting the institutional retirement space.