What Has Not Changed (Yet)?
Continuing Challenges and Unchanged Realities
Despite these regulatory and market shifts, several fundamental aspects of the DC landscape remain unchanged. One of the continuing recent challenges is the fact that plan sponsors have little incentive to embrace innovation in DC plans. This has not always been the case. Years ago, DC plan sponsors innovated by adopting new features or investments like auto-enrollment, auto-escalation, and target date funds as Qualified Default Investment Alternatives (QDIA’s). Recently, however, for many the focus has been on risk mitigation rather than innovation or evolution. Further, the way plan sponsors and investment committee chairs are evaluated also remains unchanged, with more emphasis placed on staying out of the headlines rather than on optimizing participant outcomes.
Implementation barriers remain as well. However, the growing interest in private markets is driving innovation in product offerings for DC plans. Although custom target date funds and managed accounts are not always used, new solutions are being developed to make private assets more accessible. This presents an opportunity for plan sponsors to further diversify portfolios and potentially enhance participant outcomes by adding private markets.
Another challenge may be perception. For some plan fiduciaries, their paternalistic nature has caused them to view the asset management community’s rapid increased interest in the defined contribution space with some skepticism. This is especially in light of headlines framing the $12 trillion retirement savings market as a “golden goose”4 for asset managers. As always, plan sponsors have a duty to act in the best interests of their participants.
Lastly, litigation risk continues to be a significant concern for sponsors, and while regulatory relief may address some barriers, it is unlikely to eliminate this challenge entirely. Litigation risk is often centered around fees, and including private assets is likely to increase costs even though we forecast allocations to private markets may result in higher returns/ higher participant balances. Aon’s Financial Services Group has noted that “plan sponsors which permit PE investments within their DC plan investment lineups (or self-directed brokerage windows) should expect additional underwriting scrutiny from fiduciary liability insurers. To mitigate against potentially adverse pricing and higher retentions, such insurers will likely expect plan sponsors to adequately explain how the fees associated with PE investments are benchmarked and calculated, the method and frequency with which valuations of such investments are conducted, and the ease with which plan participants can divest from these investments.”5
