A T. Rowe Price survey of defined contribution plan sponsors in the U.S. indicates that while some DC plan sponsors have “greater reported sensitivity to short-term considerations” in evaluating and choosing qualified default investment alternatives—which could make it tough in trying to help participants better long-term retirement outcomes—most are instead more focused on long-term risks.
In addition, the survey finds that when choosing a target-date strategy or other QDIA for participants, plan sponsors were most concerned about participants’ longevity risk and their ability to achieve higher retirement account balances over the long term.
Sponsors are also increasingly eager to keep retiring participants in the plan, with 69 percent saying that that objective is preferable to those participants moving their assets out of the plan. And that influences the decision to focus on longer-term objectives over volatility. Within that group, 29 percent say that keeping retired participants in the plan has become more of a priority.
And while you might expect that the emphasis on providing for retired participants would increase sponsors’ interest in limiting near-term volatility through investment selection, other survey responses indicate something different.
Sponsors’ chief concern is participants running out of money in retirement, with 42 percent saying that identifying longevity risk is their biggest worry; that’s three times the number that put the more immediate and limited concerns of addressing downside risk—at 14 percent—or volatility risk, at 12 percent, at top priority.
Just 35 percent of plan sponsors said that cutting point-in-time downside return was their most influential consideration when choosing a QDIA. However, 65 percent said that achieving the highest retirement income opportunity ranks higher in their QDIA evaluation process.
Some sponsors say that concerns about adverse sequence of returns (SoR) risk—the risk of low or negative returns late in a participant’s accumulation period or early in a participant’s retirement withdrawal period – can be a factor favoring lower equity target date allocations, in an attempt to mitigate point-in-time downside risk and volatility. But that indicates that plan sponsors might be considering risk in a broader context, including the possibility that a lower equity target date glide path might not be able to furnish enough growth for participants to save adequately for retirement.
Sixty-four percent of plan sponsors acknowledge that cutting near-term risk brings a tradeoff, suggesting that most sponsors understand that efforts to mitigate SoR risk through asset allocation could result in unintended consequences, including a lower account balance entering retirement and a potential reduction of retirement income.
Sponsors are apparently aware that attempts to prioritize managing volatility and downside risk on behalf of participants could bring tradeoffs that actually worsen retirement outcomes.
The survey results also indicate that sponsors need to better understand the balance between managing volatility and achieving growth, as well as how to use asset allocation strategies that function over a more comprehensive set of objectives and risks.
However, the survey finds that despite this, “the increasingly long-term view required to accommodate participants through their careers and potentially into retirement is consistent with a focus on preserving growth potential over time, rather than preoccupation with short-term volatility or potential downside risk.”
BenefitsPRO related reading: