Despite almost two-thirds of defined contribution plan sponsors saying their plan was the primary source of income for their workers’ retirement needs, more than half don’t think DC plans were initially designed to carry that burden, according to SEI.
There are four trends taking shape that SEI argued in a paper released in July, “The Changing Landscape Requires a New Approach,” will affect the way DC plans are managed in the future, starting with DC plans’ unseating of defined benefit plans as the primary retirement savings account for private workers.
Michael Cagnina, vice president and managing director for the firm, noted in a webinar in August that 89% of workers in the private sector have access to defined contribution plans, compared with 17% who have access to defined benefit plans.
As the percentage of workers enrolled in DC plans has increased over time, the fiduciary burden for plan sponsors has increased. Roughly 40 lawsuits have been brought against plan sponsors regarding fees over the past several years, Cagnina said, and six were brought against large organizations just in the two weeks leading up to the webinar.
“Where these litigations might end up, we’re not sure, but what we do know is there will be more scrutiny on these plans and the sponsors of the plans in the future,” Cagnina said.
Also affecting DC plan management is target-date funds’ explosive growth in retirement plans. Target-date fund assets increased 280% between 2010 and 2015, Cagnina noted, and it’s expected that by 2019, 90% of DC plan contributions will be invested into TDFs.
“There needs to be particular attention paid to how target-date funds are constructed, monitored and improved over time,” he said.
Finally, asset management and recordkeeping functions have undergone a “decoupling,” Cagnina said, and retirement plan providers are facing challenges in transparency and independence.
There are three fiduciary models plan sponsors can follow, Cagnina said. They can leave fiduciary responsibility entirely in the hands of the investment committee, which will be responsible for all policy and investment decisions, and oversight of the plan.
The committee needs the time, expertise and resources to commit to that responsibility, Cagnina said. It may rely on other providers, like the investment provider, but that creates a conflict of interest.
“If your only overseer of the assets is the organization who is investing the assets, conflicts may arise,” he said.
Furthermore, changes to the investment lineup under this model tend to be limited as those changes take time and can be confusing to participants.
A second model is for the investment committee to bring in a consultant to be a co-fiduciary. That takes pressure off internal resources, but there are still issues for participants when there are changes to the investment menu.
A discretionary manager can take the full fiduciary burden off the investment committee, Cagnina said. The discretionary manager can provide not just oversight, but implementation, he said, so the plan sponsor can focus on education.
“These are the things that are ultimately going to drive success for the plan sponsor and for each participant in the plan,” he said.
By white labeling multi-manager funds for a specific plan, discretionary managers can also make changes within funds without increasing disruption for participants. “This is the approach that DB plans have used for years and will lead to less confusion, fewer options and ideally better investment results,” SEI noted in the paper.
Investment committees for plans with a discretionary manager will transition away from making decisions on hiring and firing investment managers, and developing and maintaining the glidepath of a target-date series, according to Al Pierce, vice president and managing director of the advisory team for SEI’s institutional group. Their new responsibilities will include “those strategic areas that frankly can have more of an impact on participants at the sponsor level,” he said, like the higher-level strategy of the plan and education.
The committee will also manage and oversee the discretionary manager, he said.
Sponsors who have invested in a passive-only approach for participants may find white labeling plans doesn’t make sense, Cagnina said.
“You really can’t replicate all asset classes with passive investments,” he said.
Another challenge is that as new investment approaches take root in the marketplace, they won’t be easily indexed into a portfolio. “But certainly if the core menu is going to be vanilla passive, the white label approach will not have as much attractiveness to the plan sponsor.”
It’s easier to white label a target-date series, he continued.
Some sponsors with sufficient internal resources to manage their DC plans may decide to hire a discretionary manager for certain parts, according to Cagnina. “They may look at a particular area of the market where they’re looking to get added diversification or they’re looking for multiple managers and they may be wanting to streamline their choices into one,” he said.
— Read 3 IRA Transactions Exempt From DOL Fiduciary Level Fee Rule on ThinkAdvisor.