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August 24, 2016 at 09:40 AM
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.
