Despite market volatility and a global pandemic, participant account balances in defined contribution (DC) plans improved in 2020. As we progress into 2021 with a new Administration, we are focused on DC trends that may impact plan sponsors and participants not only in 2021, but also in the years to come. Here, we discuss some macro categories for consideration in 2021 and beyond.
Source: GSAM, as of February 2021.
Move Towards Outsourcing:
OCIO for larger plans – The outsourced CIO (OCIO) space is substantial and growing. When considering whether to engage an OCIO, asset owners typically consider their governance structure and internal resources, desired investment strategy and costs. Three key trends in the OCIO space have been (1) larger asset pools, (2) broader client types and (3) more customization and a broader range of services.
PEP offerings for smaller plans – Pooled Employer Plans (PEPs) were created under the SECURE Act of 2019 and allow unrelated employers to join the same retirement plan. This has the possibility of transforming the DC retirement landscape in the coming years. One question everyone is asking is whether or not PEPs attract adoption upmarket.
Continued Focus on Retirement Income:
Post-SECURE Act – There is no dominant retirement income approach (yet). The Retirement Tier concept is an emerging trend and there continues to be education around distribution options. There continues to be product development for both in-plan and out-of-plan solutions. This includes guaranteed and non-guaranteed solutions. We see recordkeeping developments with respect to distribution capabilities and importantly, all major players and industry constituents want a seat at the table for this important defined contribution initiative.
Business Model Transformation:
Pressure on asset managers and recordkeepers has led to industry consolidation and evolving business models – In addition to consolidation and evolving business models, we continue to see an increasing trend in passive management. There continue to be Requests for Proposals (RFPs) and Requests for Information (RFIs) for vendors and fee benchmarking. Industry consolidation persists.
Plan & Participant Level Customization:
Demand for tailored solutions and insights; increase in digitalization – Overall, we see an increasing desire for customization – both at the plan sponsor and participant levels.
Evolving Participant Preferences:
Participant interest in ESG-friendly options and other evolving preferences – There has been continued streamlining of the investment structure in line with behavioral finance findings. The role of fixed income in the core menu and retirement tier has garnered attention. There continues to be participant demand for additional services (such as student loan debt repayment).
Regulatory & Litigation Environment:
New Administration may bring changes while the global pandemic has not slowed the pace of DC litigation – With new DOL leadership and a Democratic-controlled Congress, there is the potential for meaningful impact on retirement policy from Washington, D.C. We see continued DC class action litigation in spite of the global pandemic.
Move towards individual financial resiliency from financial wellness – We view financial resiliency as a component of financial wellness. Individuals are focused on topics broader than just retirement. The role of emergency savings, for example, would fall into this category. For the plan sponsor, focusing on an individual’s financial resiliency needs can allow the plan sponsor to keep employees engaged, productive and focused.
While DC plans, like other investors, continue to deal with a global pandemic, we are beginning to see 2021 agendas that are more proactively focused on the topics mentioned.