New year, new reality:
Action steps for DC plans in 2017

Jan 9, 2017

Turning the calendar to January has symbolic meaning, but the reality is that the New Year usually looks very much like the old one – at least at the start. It’s too soon to tell if this year will be different, but there are signs that we may look back on this New Year as marking some significant changes.

 


We do not know the policy and regulatory consequences of the contentious election cycle. Also, the Fed has resumed rate hikes. And perhaps most importantly to retirement savers, an industry consensus has formed that we now face an extended period of reduced capital market expectations.1 Many of us in the industry are already deeply concerned that participants are not saving enough and that longer lives will strain their retirement resources. The potential for lower returns may be another new reality DC plans will have to navigate.

Fortunately, there is a lot that plan sponsors can do to help their participants achieve better retirement outcomes in 2017 and beyond.

Four action steps for DC plan sponsors in 2017

Step 1: Seek additional return opportunities

Most participants are not investment experts. Most are probably unaware of reduced capital market expectations, and they are unlikely to know how to respond even if they were. It is up to us – plan sponsors, providers, consultants and advisors – to guide them, not by overreaching or exposing them to too much risk, but by seeking consistent incremental sources of return.

Additional returns may be encouraged by:

  • Using a wider range of fixed income strategies to diversify away from interest rate risk or increase credit risk exposure to enhance returns.
  • Considering cost-effective smart beta index-based strategies as a supplement or alternative to cap-weighted index exposure.
  • Reducing costs and adding additional returns by using more efficient pooled vehicles and securities lending within index exposures.

Step 2: Maximize the target date fund

Target date funds receive the lion’s share of new flows and are growing in importance on the retirement landscape. Fortunately, their multi-asset class structure and glidepath designs are robust enough to accommodate a wide range of investment objectives, demographic information and capital market forecasts. This makes them an idea vehicle for helping participants manage the new reality of retirement.

A checklist for your target date fund may include:

  • Ensuring that the initial equity level is at its maximum when participants can take the most risk and reviewing when and how rapidly it de-risks in late career.
  • Exploring whether custom solutions can incorporate fewer liquid asset classes, such as private real estate and alternative investments, often included in defined benefit portfolios to increase diversification.
  • Considering reenrollment so that all participants can benefit from the target date fund’s age-appropriate diversification.

Step 3: Drive increased savings

What most determines a participant’s retirement future? Her own actions. If she does not save or does not save enough, she will struggle managing retirement, regardless of the investment solutions offered. While it is up to participants to save, it is also up to plan sponsors to encourage saving – especially now. Increasing saving can go a long way in helping make up for the lower returns participants may earn on their savings.

Plan sponsors may need to:

  • Leverage data to understand participant needs and identify gaps in retirement readiness. Are participants on course at their current contribution rates? Are they taking advantage of the default options?
  • Maximize plan design tools – including auto features– to increase plan usage and deferral percentages.
  • Help drive greater engagement at all life stages with more strategic communications tailored to specific employee demographics. For example, sending income calculators and retirement planning material to participants over 55 to help them prepare for the transition.

Step 4: Prepare to keep post-retirement assets

The fate and impact of the recent Department of Labor Fiduciary Guidelines is currently unclear, but regulatory and demographic changes may mean that more participants will remain in their plan post-retirement. Plan sponsors should consider this an opportunity to help participants with perhaps the toughest retirement challenge: spending their savings.

There’s a lot to be done to meet this challenge, but 2017 is a great year to take the first steps:

  • Review the plan policy to allow for post-retirement retention and partial distributions.
  • Develop targeted communications to help participants understand their options and the potential benefit of inexpensive professional management once they retire.
  • Consider investment options to help retired participants manage their income needs.

We frequently remind participants to focus on what they can control: their savings and planning behavior. As plan sponsors and providers, we can do something similar. We don’t know what 2017 will bring, but we can control how we prepare our plans for the future. Consider the four action steps suggested here as a start.

Anne Ackerley
Managing Director, Head of BlackRock's U.S. and Canada Defined Contribution Group
Anne F. Ackerley, Managing Director, is head of BlackRock's U.S. & Canada Defined Contribution (USDC) Group. She is responsible for the development and ...