What trends are impacting DC plan investment menus?
The NEPC has released its 2021 Defined Contribution (DC) Plan Trends and Fees Survey, examining current plan investment trends and innovations in key sectors.
While target date funds (TDFs) continue to be the “turnkey solution,” the NEPC notes that one of the most important developments is that the menus are shifting towards index funds. In 2021, 44% of respondents had plan assets invested in TDFs, up from 28% in 2011. Additionally, 97% of plans offer TDFs and 95% of 2021 respondents use TDFs as their default plan.
With respect to index funds, the study shows that 38% of plans currently offer index TDFs, up from 34% in 2016, and 70% of these plans offer a “level” of three or more index funds on their menu of based. The median percentage of plan assets invested in index funds is 15%. Meanwhile, active TDFs have fallen from 58% in 2016 to 46% in 2021, while mixed TDFs have fallen from 8% in 2016 to 12% in 2021. significantly transform the market,” said Bill Ryan, Partner and Head of Defined Contribution (DC) Solutions at NEPC. “Investment managers are now evolving their TDF offerings to include payment features or spending advice.”
Meanwhile, the adoption of managed accounts has remained stable over the past three years, which goes against expectations given the strong marketing promotion of archivists, notes the NEPC. According to company data, the percentage of plans offering managed accounts was 38% in 2021, compared to 36% in 2020 and 28% in 2017. For the percentage of plan assets investing in an account service managed and the percentage of participants registered with this service, the median of the survey was 7%.
Noting that it may be too early to call this a trend, the company adds that it’s starting to see more customers consider phasing out managed accounts than adopting them. Nevertheless, “Overall, we believe that at a reasonable level of fees, managed accounts can be a useful solution to help participants achieve individualized goals,” the study points out.
While impending U.S. regulatory updates could lead to increased adoption of retirement income and ESG investment options in 2022, NEPC further observes that 2021 data highlights current income gaps lifetime warranty and ESG menu options. Last year, only 6% of plans offered an ESG or socially responsible labeled option, but the company expects increased adoption as the regulatory landscape eases. Many active managers are also beginning to consider ESG in stock picking, the company notes.
Additionally, almost all sponsors currently offer the makings of a “retirement level,” but most plans don’t have an option that offers guaranteed income for life. The study shows that only 1% of plans offer an investment option with guaranteed income for life. Still, the firm predicts guaranteed income and ESG solutions will make slow progress in 2022.
Meanwhile, some types of plans may evolve into custom solutions or white label funds for better use of risk management, expanding mandates or introducing new asset classes or niche managers as that fixed operational costs become less burdensome, notes the NEPC. The report shows that the prevalence of white label funds by plan size:
- less than $500 million (2%)
- $500 million to $2 billion (16%)
- $2-5 billion (40%)
- $5 billion or more (58%)
Additional findings show that:
- 99% of plans offer a capital preservation option;
- 88% of plans offer installment payments (depending on plan rules);
- Only 2% of plans offer a managed payout fund;
- 63% of plans offer self-directed brokerage accounts, up from 60% year over year;
- 50% of plan registrars have a non-plan annuity market;
- the average number of core investments is 11; and
- 39% of plans offer TIPS, REITs or other types of inflation-sensitive investment options.
Further, while less than 1% of schemes offer dedicated private markets, the NEPC suggests that alternatives such as private equity, private real estate and hedge funds make sense as part of a multi- assets managed by professionals.
“Because the Great Resignation has put immense pressure on the retirement ecosystem, flexible features and goal-oriented investment options are now decisive and decisive factors,” Ryan points out. “This survey helps illustrate how plan sponsors seek consultation beyond simple ESG negative screening and TDF ‘best practices’. Plans is looking for partners to advise on new opportunities in 2022 and beyond.
Conducted online by the NEPC’s Defined Contribution Practice Group, this year’s survey included 137 defined contribution plans (68% business, 25% healthcare and 8% public, nonprofit respondents and Taft Hartley) representing $230 billion in global assets and a total of 1.6 million plan participants.