Grant’s Go-To’s: Mining 2020 Defined Contribution Surveys for profit and pleasure
Have you taken the time to consider how the state-facilitated retirement savings program you are developing, or administering, compares to U.S. Defined Contribution (DC) plans? This week we highlight two benchmarking studies that provide an overview of trends in DC plan design features, products and services.
Plan Sponsor magazine’s 2020 DC Survey is a benchmarking report based on data from over 2,000 Defined Contribution plan sponsors. The survey included questions about plan administration and design features such as default deferral (contribution) rates, automatic features and investment offerings. Among the key findings is that more than half of DC plan sponsors use automatic automatic enrollment. Plans with automatic enrollment and auto-escalation have higher participation rates than those with no automatic features. Additionally, from 2018 to 2020, there was a slight uptick in the percentage of plans offering annuities or some form of income creation product.
Callan, an investment consulting firm, released the results of its 13th annual survey of plan sponsors in 2020. In the 2020 Defined Contribution (DC) Trends Survey, plan sponsors identified fees and participant communication as top priorities. The survey also found an all-time high 87 percent of plans now offer a Roth feature.
The Employee Benefits Research Institute (EBRI) released an issue brief on the distribution of Individual Retirement Account (IRA) types and account balances, contributions, withdrawals and asset allocation. The focus on IRAs might be of particular interest for anyone working on state-facilitated IRA plans. EBRI membership is required to access the full brief, but a summary is available here.
Now that Defined Contribution assets exceed Defined Benefit pension assets, experts seem to agree that the need for solutions that provide stable lifetime income is more important than ever. Adoption rates for annuities and other income generating solutions by plan sponsors and participants, however, have been low.
A 2020 working paper published by the National Bureau of Economic Research (NBER) uses data from TIAA to examine why demand for annuities is low. The authors of Recent Trends in Retirement Income Choices at TIAA: Annuity Demand by Defined Contribution Plan Participants conclude that low demand is driven by low interest rates and the fact that more plan participants are delaying taking distributions from their accounts. People who begin drawing income at later ages are much more likely to withdraw only the amount needed to meet the Required Minimum Distribution (RMD). For more information, you can read the full report or a summary.
Despite the challenges – or perhaps because of them – there has been a lot of innovation with respect to annuities and other income generation strategies in recent years. A 2019 report by the Georgetown Center for Retirement Initiatives and Willis Towers Watson provides an overview of potential solutions. The report is titled, Generating and Protecting Retirement Income in Defined Contribution Plans: An Analysis of How Different Solutions Address Participant Needs.
In the coming weeks, we’ll focus on the numerous plan administration and design decisions that go into the development of state-facilitated retirement savings programs. Among other things, we will look at considerations for decisions about program type (e.g., MEP, auto-IRA, marketplace, hybrid), employer mandates and enforcement mechanisms, automatic enrollment and escalation options, default contribution levels and investment options. We will examine the pros and cons of various design decisions and provide some insights about trends among your peers.
Stay tuned! / Grant
This piece was featured in the January 28, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
