By Josh Cohen, Head of Institutional Defined Contribution at PGIM
As I reflect on my conversations with large Defined Contribution (DC) plan sponsors, there are common themes, comments and questions that have come up consistently over the course of the year. It’s not surprising, as many are dealing with the same dynamics as it relates to helping their participants meet their retirement readiness objectives while navigating through the current market and regulatory environment.
Here are the top five themes I’ve heard from plan sponsors this year, including potential implications for 2020:
- “I want to better educate myself and the committee on retirement income solutions, but we aren’t quite ready to implement anything yet.” Changing demographics, activity in Washington, and the evolution of solutions are all spurring greater interest in retirement income. The question is: will there be meaningful action in this area? Based on my conversations, I expect the strong interest in this topic to continue in the new year, but I think sponsors need help getting to the implementation stage. Enhancements to their plans to better support lifetime income will be evolutionary, not revolutionary, but change will undoubtedly be happening.
- “Will the SECURE Act actually pass?” Sponsors are looking for safe harbor and support from regulators to more effectively incorporate lifetime income solutions in their plans, and provisions in the SECURE Act would clearly help. It passed the House of Representatives overwhelmingly in May and while I can’t predict what will happen in Washington, we are optimistic that it could pass after being attached to a budget reconciliation bill. It’s clear to me that sponsors want to innovate but have fiduciary concerns, so support from policy makers will be critical.
- “I want to implement a more institutional investment approach, but I am worried about getting sued.” Leading plan sponsors look to improve outcomes for their participants by implementing an institutional investment philosophy, which includes a thoughtful mix of active and passive management and the use of diversifying asset classes. Despite understanding the benefits of such an approach, many plan sponsors I meet with feel this puts them at greater fiduciary risk. I think this healthy tension will continue, but many will realize that a purely simple investment approach isn’t likely to lead to better outcomes over the long-term. I expect to continue to talk to sponsors about how utilizing an institutional approach can give the average American greater access to investments that large institutions and high-net-worth individuals have the benefit of accessing.
- “I want to enhance my line-up, but I’m not quite sure how.” While some sponsors are concerned with the perceived fiduciary risk of implementing a more institutional approach, others want to do so but need help getting there. This includes a desire to move to institutional vehicles such as collective trust funds, white label funds and custom target date funds. At PGIM, we continue to support sponsors by reviewing the insights and research within our DC Menu Workbook. For plan sponsors who are having trouble convincing their committee to make a wholesale change, I often explain that it doesn’t have to be an all-or-nothing proposition. Changes can be limited to one or two asset classes to start. I also expect many plan sponsors will turn to third parties such as an Outsourced CIO (OCIO) to help implement such approaches.
- “How should I be thinking about ESG?” The topic of ESG is getting a lot of attention in the market overall and in DC, specifically. While it comes up frequently, implementation in DC plans is modest. I believe plan sponsors will continue to be in education mode on ESG and will continue to have conversations with their committee. This is a critical first step given the spectrum of approaches out there to implement ESG, the varying opinions on the efficacy of ESG, as well as specific fiduciary considerations. I don’t think we will see a large proliferation of ESG-specific options offered on DC menus. Instead, sponsors may look to further align their views on ESG with how their managers incorporate these factors into their security selection process.
It was an eventful year full of critical discussions with plan sponsors who are dealing with significant issues related to the retirement outcomes of American workers. I’ve enjoyed these conversations and I look forward to further engaging with sponsors in the new year.
Happy holidays to all.