Summer 2021 Fiduciary Commentary
Callan’s 2021 Defined Contribution Survey captures the view of a broad spectrum of large and mega-plan sponsors on various retirement plan topics. The most recent survey was conducted in October 2020 and incorporated responses from over 90 large defined contribution plan decision makers. Most respondents came from organizations with over 10,000 plan participants and from plans (over 90%) with more than $100 million in assets with 70% topping in at over $1 billion.
Survey respondents spanned a broad range of industries including financial services and insurance, utilities, energy, government, automotive/construction, mining/manufacturing, and health care. A full 67% of survey participants were corporations while the others came from government and tax-exempt entities. Of the pool of respondents, 82% sponsored a 401(k) plan, 31% maintained an open defined benefit plan and 70% offered a non-qualified deferred compensation arrangement (and 73% sponsored the government equivalent, a 457 plan).
The annual Callan survey is designed to provide fiduciaries with valuable insight and identify trends developing in the marketplace. The survey’s findings can provide an important point of reference for committees to evaluate their plan’s provisions and policies. While the study is very broad covering a vast array of plan topics and features, what follows are the key findings that stood out from the data.
The trend of utilizing mutual fund alternatives in defined contribution plans continues to grow. Over the past decade, mutual funds have lost significant market share to collective trusts (CITs). mutual funds’ share of the respondents’ assets was down nearly 10% over this period, while CITs utilization increased by about 25%. Separate accounts and unitized funds also increased in prevalence with the later mostly in the largest plan sizes ($1 billion and higher).
CITs are pooled investment vehicles operated by a bank or trust company for use in ERISA plans, as well as for certain types of government plans. Their growth is warranted as the investments can often cost significantly less than the mutual funds they are modeled after.
Target-date funds (TDFs) have been the most popular CIT products and they continue to gain market share as plan default offerings. The survey found that only 42% of respondent’s used a mutual fund based TDF in 2020 in comparison to 67% in 2010 with CIT products taking up the slack. Furthermore, the prevalence of a plan recordkeeper’s proprietary target date fund amongst the survey respondents continues to drop. Less than 30% utilized a proprietary TDF in 2020 in comparison to over 67% a decade ago. Target date fund due diligence was active, with over 64% of respondents taking at least one action item around their TDFs. Most common cited TDF due diligence items in 2020 were evaluating the suitability of the glidepath and underlying investments.
The most common plan design features available in 2020 were Roth deferrals (79%) and plan automation (70%). For reference, in 2010 the Callan survey found that only 37% of plans offered Roth contributions. Roth accounts were also the most common plan enhancement anticipated in 2021 with 8.3% of sponsors intending to add the after-tax savings feature. Roth accounts are seeing a resurgence among plan sponsors likely due to the popularity of in-plan Roth conversions. In 2020’s survey findings, 68% of plans offered this plan conversion feature.
Not surprisingly, a full 10% of sponsors eliminated, reduced, or suspended plan match contributions in 2020, likely a result of the financial uncertainty triggered by the pandemic. This number was double the amount in previous years. More than 60% of those sponsors intended to reinstate their plan match in 2020 or 2021.
The survey identified that 62% of defined contribution plan sponsors offered either advice or a managed account service to their participants. Managed accounts are discretionary investment services operating under Section 3(38) of ERISA. They are designed for participants who want a “do-it-for-me” investment service from an independent third-party that implements personalized portfolio recommendations. The service often includes a variety of tools, communication, education, and in-person or phone counseling for participants.
Addressing Plan Leakage
Plan leakage is the erosion of participant savings by unpaid plan loans, hardship withdrawals and distributions that significantly reduces the probability retirement success. A study by the Federal Reserve Board found that as much as 40 cents of every dollar contributed to defined contribution plans for participants under age 55 eventually leaks from their savings when participants terminate employment or change jobs. Modifying plan features and practices can have a meaningful impact on reducing leakage and successful income replacement in retirement.
A full 90% of sponsors have taken steps to reduce this drain from retirement savings. Among the measures identified in the survey were the offering of partial plan distributions (not just only total distributions) to encourage terminated employees to maintain plan savings, installment payments to help facilitate a replacement income stream in retirement and allowing participants to continue to pay off plan loans after termination.
Retention of Participant Assets
There appears to be a renewed focus on retaining the assets of both retiree and terminated participants. More than 66% of sponsors noted they sought to retain the assets of both, a significant increase from five years ago (43.5%). Retiree assets were identified as more desirable to retain.
Numerous explanations for this trend are most notably that retirees typically have larger account sizes and support the plan’s economics and pricing. Clearly sponsors need to evaluate the trade-off from the fiduciary liability of retaining assets of terminated participants (maintaining contact data to provide required plan notices, among others) with the efficiency gained by retaining the assets.
CARES Acts and Pandemic Response
The impact from the COVID-19 pandemic was felt by individuals, families, and communities around the world. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was introduced in March of 2020 to combat the financial fallout from the pandemic. The legislation was part of a $2 trillion stimulus package that includes direct payments to taxpayers, unemployment benefits, and assistance for businesses.
The law modified several retirement provisions and was made immediately effective to address the pandemic’s economic impact on savers. The focus of the legislation was to relax rules and diminishing the tax consequences of plan loans and distributions from retirement plans for pandemic related events.
Of the various plan provisions modified by the CARES Act, the following were implemented by the survey’s respondents with the identified frequency.
- 73% adopted Coronavirus-related distributions
- 55% implemented suspension of plan loans payments
- 42% increased the maximum plan loan amount
- 34% allowed required minimum distributions to be repaid to the plan
Callan’s Defined Contribution Plan Survey provides valuable statistics to fiduciaries to gauge their plan’s features in comparison to the large and mega-plan market. The output helps discover design and benefit trends developing in the marketplace and offers actionable insight to help enhance their plans and the financial outcomes of their participants.