Employers Set Sights on Innovative 401(k) Plan Design Changes

By Ted Godbout

To boost their plans’ value and enhance their employees’ overall financial wellbeing, U.S. employers are eyeing innovative features for their defined contribution plans, according to a new survey.

Willis Towers Watson’s 2020 U.S. Defined Contribution Plan Sponsor Survey found that two in three employers either have or are very interested in adding at least one innovative design feature to their plan.

The most popular feature reported is assisting employees in building emergency funds for rainy days via Roth plans or other after-tax contribution provisions (45% currently offer or are interested in such features). The second most popular feature is linking student loan debt repayment to the DC plan, allowing employees to work down their loans while still benefiting from employers’ contributions toward retirement. The study notes that only 2% of survey respondents had adopted this feature, but 19% are strongly attracted to it.

Other features employers have adopted or are considering include:

  • Promoting health savings account/401(k) contributions.

  • Flexible choices from benefit menus, including DC contributions.

  • Directing paid time off to DC plan contributions.

  • Rewarding contributions such as service anniversaries.

  • Varying contributions by workforce segments.

  • Rethinking the balance between employer and employee contributions.

The survey also found that interest for lifetime income options to help generate a steady stream of income in retirement from DC plans is accelerating. According to Willis Towers Watson, 16% of plans currently offer lifetime income options in the DC plan and 6% offer lifetime income as an outside feature. Another 15% and 10%, respectively, are planning for or considering lifetime income to be added in the next two years, which, according to the firm, represents a significant change from the 2017 survey, when just 7% of employers offered or were planning or considering providing in-plan lifetime income.

“In a world where fewer and fewer workers are relying on a traditional pension plan, the responsibility for building adequate retirement savings and generating income in retirement falls primarily to them,” notes Michele Brennan, U.S. leader of Defined Contribution Solutions at Willis Towers Watson. “Employers recognize this and are in the best position to provide support and guidance. And, as our research shows, most employers are taking an active role in helping their employees achieve that goal through their DC plans.”

Also top of mind for many employers is employees’ financial wellbeing and its potential impact on organizations. Slightly more than a third of respondents (34%) indicated that short-term financial stress among workers is creating workforce challenges—up eight percentage points from three years ago (26%). Additionally, 36% of employers believe financial stress will pose future workforce challenges.

Other key findings from the survey include:

  • DC fee litigation: The vast majority (80%) of plan fiduciaries report that managing fees is a major priority, representing an increase of 14 percentage points over the past three years, as lawsuit activity targeting DC fees continues unabated.

  • Fees: Three in four respondents (75%) have benchmarked their recordkeeping fees over the past three years. Nearly two-thirds (64%) reported their benchmarking resulted in lower administrative fees, while a third (32%) were able to reduce investment expenses.

  • Risk management: Nearly 4 in 10 respondents (37%) indicate that managing the cybersecurity of participants’ accounts is their top risk management and fiduciary concern. And 24% are very concerned over the selection and monitoring of investments and keeping plan fiduciaries current on regulatory and market trends.

  • Target date funds: There apparently is a growing focus on TDF “fit,” with a reported 53% increase in the number of committees reviewing TDF suitability with participant needs.

  • Delegated investment consulting: The percentage of plan fiduciaries using delegated investment consulting services has more than doubled over the past three years, from 6% in 2017 to 15% in 2020.

  • Reinstating employer contributions: Most employers that suspended or reduced employer contributions this year expect to reinstate them by 2021, with 60% indicating that they will reinstate the contributions at the same level as prior to their suspension or reduction.

  • Inclusion and diversity: Nearly two-thirds of employers have reviewed or plan to review various aspects of their DC plan as part of their inclusion and diversity strategy.

Willis Towers Watson’s survey was conducted in September and is based on responses from 464 U.S. employers that sponsor at least one DC plan; 52% of respondents had at least $1 billion in plan assets.

Source: National Association of Plan Advisors

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