As the defined contribution (DC) market continues to evolve, many plan sponsors are looking at innovative solutions to support their participants' retirement savings needs. PGIM recently published a series of research papers on topics within the DC space that are emerging as key components of retirement readiness: the use of alternative investments, the growing role of ESG, and income in retirement. We also brought together retirement thought leaders to discuss our findings, and the following are highlights from the webinar.
- Not all alts are created equal: Institutional investors often incorporate alternative investments into their portfolios for their diversification benefits and attractive risk/return profiles. But individual investors historically have not had access to alts in DC plans, in part due to the operational challenges, and the belief that most participants should not have access to more “sophisticated” investments. The DC industry has made good progress with certain types of alts, especially as it relates to operations, fees, transparency, and education, and to the extent it is feasible, DC sponsors should look to portfolios of their institutional counterparts as guidance when designing investment options.
- Momentum in ESG continues to grow: Interest in ESG has risen in recent years, though it remains an emerging area for DC sponsors. It’s also an evolving area with varying definitions and where new research is being unearthed on a regular basis. While guidance from the Department of Labor has historically been inconsistent, the Biden administration is likely to try to find a way to allow consideration of ESG in target date funds. Meanwhile, there are a spectrum of ways that plan sponsors can explore and implement ESG, both through investments and engaging with partners.
- Income in retirement - an evolution, not a revolution: While retirement savings plans have undergone significant evolution over the last four decades, they still fall short in providing workers with lifetime retirement security – a significant gap given that DC plans are a primary source of most participants’ retirement income. DC plans have typically focused on helping participants accumulate retirement savings, not on converting those savings into a steady stream of income in retirement. Sponsors have an opportunity to review their plan's available distribution types. As an example, systematic withdrawals, as opposed to a single lump-sum distribution, would allow participants to set up a process to automatically withdraw portions of their DC plan balance over time.
- How technology can help drive innovation: There are several ways sponsors can further the process of providing opportunities for income in retirement, and one of those is leveraging the power of technology to provide more tailored advice and investment solutions. By embracing new technologies, along with more robust communications about income, customization opportunities, and risk mitigation solutions, DC plans have the potential to help workers meet their retirement-income challenges.