Defined contribution plans represent nearly $7 trillion of the $24 trillion in nationwide retirement assets, according to the Investment Company Institute, and more growth is expected.
Cammack Retirement has identified nine hot trends that people on any side of a defined contribution plan should keep their eye on in the coming year and beyond.
1. Shift toward 401(k)-style retirement plans by public employers
DC plans already dominate the corporate and tax-exempt marketplaces, and the trend appears to be picking up in the public sector as well. Some municipalities and states have been considering moving employees to enhanced DC plans and enrolling new employees in them. Some, like Tennessee and Rhode Island, have rolled out “hybrid” plans in an effort to battle pension shortfalls.
2. Greater focus on behavioral finance and retirement readiness
What can plan sponsors do to drive responsible financial behavior among plan participants? Encouraging participants to contribute enough to maximize employer matching and to choose wise investment vehicles are two options that work, rooted in an understanding of how participants actually use their plans. Plans will continue to study plan participant behavior and fine-tune their education resources and messaging accordingly. Increased automation in both enrollment and escalation are other potential drivers of retirement savings that may grow more popular with plan sponsors.
3. Consolidation of investment menus In keeping with research on behavioral finance, economists have discovered that fewer investment options within a plan actually increase participation. Consolidating an expansive and potentially confusing menu of options through formally reviewing and evaluating funds available will make things easier on plan participants.
4. Additional asset classes for greater diversification
Plan sponsors will institute new asset classes such as Treasury Inflation Protected Securities (TIPS) and Real Estate Investment Trusts (REITs) and shorter-duration fixed income products to hedge against inflation and rising interest rates.
5. Fee scrutiny leading to greater consideration and use of alternative investment structures
Mutual funds and variable annuities are the main investment vehicles used by DC plans today, but collective trusts, separate accounts and exchange traded funds are gaining popularity – except in the case of 403(b)s, where the use of collective trusts is federally prohibited.
6. Facing the challenges of the fixed annuity and stable-value fund marketplace
Shrinking wrap capacity has made stable-value funds more expensive and placed limits on the investment strategies of people managing those funds. Participant credit ratings and minimum guarantees are both falling. These difficulties make it paramount for fund managers to be vigilant in making sure that investments they are involved in are prudent and secure, and will continue to be.
7. Growth of QDIA-appropriate funds. QDIA-appropriate funds will grow, and continue to address the savings and accumulation phase of the retirement cycle.
8. Participant desire for guaranteed income It’s no surprise that plan participants are looking for the same thing out of DC plans as they would from a defined benefit pension when they hit retirement — that is, guaranteed income. Insurance companies and third-party providers will have to step up their game to meet this growing demand, and there will be corresponding legislative guidelines for the use of new products that plans implement to fill this need.
9. Regulatory scrutiny and legislation
The body of federal regulation around retirement plans will continue to grow in 2015 and beyond. The first revision of the fiduciary rules since ERISA was implemented in 1974 will happen in 2015.