2015 Defined Contribution Trends
CALLAN
INVESTMENTS
INSTITUTE
Survey
2 Knowledge. Experience. Integrity.
Callan fielded the 2015 Defined Contribution (DC) Trends Survey in the fall of 2014. Survey results incorporate responses from 144 plan sponsors, primarily large and mega 401(k) plans. More government and other not-for-profit plans are represented in this survey than in prior years. We highlight key themes from 2014 and expectations for 2015 in this executive summary. An Active Year for Target Date Funds
The target date fund (TDF) landscape saw considerable movement in 2014.
• About one in 10 plan sponsors replaced their target date fund/balanced fund manager in 2014.
• The proportion of plans that offer their recordkeeper’s proprietary TDF declined precipitously, from 47.5% in 2013 to 28.7% in 2014. Plan sponsors expect this number will decrease even further in 2015 (to 23.6%).
• Plans with custom target date funds increased materially, from 11.5% in 2013 to 22.3% in 2014.
• In second place, fees now outrank performance as a criterion for selecting or retaining a TDF. Fees had ranked third between 2009 and 2013.
• The proportion of plans with indexed target date funds remained steady between 2013 and 2014 at around 42%.
• TDFs continue to trump other options as the most prevalent choice of default investment fund for participant-directed monies (74.6%).
Plan Sponsors Refine Their Approach to Plan Fees
• The most important step that plan sponsors took within the past 12 months to improve the fiduciary positioning of their DC plan was to review plan fees. However, fewer plan sponsors calculated or benchmarked plan fees in 2014 than in 2013, and fewer reduced plan fees after conducting a fee evaluation.
• There was a noticeable spike in changes to the way fees are paid in 2014. More than twice as many plan sponsors changed the way fees are paid in 2014 as in 2013, for example moving from revenue sharing to an explicit per-participant fee. More plan sponsors also changed the way fees are communicated to participants.
• More than half of plan sponsors are somewhat or very likely to conduct a fee study in 2015, which is not surprising given the need for plan sponsors to evaluate the reasonability of their DC plan fees annually. Furthermore, 46.7% of plan sponsors are somewhat or very likely to switch certain funds to lower-fee share classes and 44.3% intend to renegotiate recordkeeper fees in the coming year.
• Plans that offer potentially lower-cost investment vehicles, such as a collective trust, notably increased in 2014.
Executive Summary
Mix of index and active management Actively managed Indexed 34.7% 23.5% 41.8% 0% 20% 40% 60% 80% 100% 2014 2013 2012 2011 2010 See page 22. 42.7% 42.5% 50.6% 60.0% 48.3% 51.9% 2012 2013 2014 Collective trusts Separate accounts See page 26.
3 Knowledge. Experience. Integrity.
A Muted Response to Recent Regulations and Lawsuits
Plan sponsors are taking a wait and see approach to changes in the regulatory and legal landscape.
• The Supreme Court’s ruling against using presumption of prudence as a DC stock-drop case defense did not spur immediate changes among plan sponsors; some are waiting to understand the full implications of the ruling.
• Few plan sponsors are making changes to their investment fund lineup despite the Securities and Exchange Commission’s recent amendments to money market regulations.
• Even though the U.S. Treasury issued regulations in 2014 facilitating the use of longevity insurance in qualified DC plans, very few plan sponsors say they are very likely to add longevity insurance in 2015.
Automatic Features Are Increasingly Common, but Implementation May Fall Short
More plan sponsors are offering automatic features in their plans, although robust implementation is not the norm. • Automatic enrollment usage increased for the fourth year in a row to reach 61.7% of plans.
• Only one-third of plans offer both automatic enrollment and automatic contribution escalation.
• Defaults for automatic enrollment range from 1% to 10%, with an average of 4.3%. Plans with opt-out automatic contribution escalation most frequently have an annual increase rate of 1% with a cap of 6%.
Fees Are Also a Focus in Investment Structures: Indexing and Institutional Structures Increase in Prevalence • Sixty percent of plan sponsors conducted an investment structure evaluation within the past year.
• Many plan sponsors increased the proportion of index funds in the plan (27.3%). This trend should continue in 2015. • More than three-quarters of plans (77.3%) now offer some kind of institutional structure—either collective trusts, separate
accounts, or unitized private label funds.
Retirement Income Solution Adoption Is Still Slow Retirement income solutions made little headway in 2014.
• Most DC plan sponsors do not offer a retirement income solution and are unlikely to do so in 2015. When they do offer one, it tends to be via access to their defined benefit plan.
• Many plan sponsors provide a retirement income projection to participants, and communicating about retirement income adequacy is a high priority. However, few sponsors use retirement income adequacy to measure the success of their plan. In 2015, participant communication, fund/manager due diligence, compliance, and plan fees are high priorities.
Executive Summary
0% 20% 40% 60% 80% 100%
Other In-plan guaranteed income for life product
(e.g., MetLife, Prudential)
Managed accounts income/drawdown solution
(e.g., Financial Engines)
Annuity placement services
(e.g., Hueler Income Solutions)
Annuity as a form of distribution payment None
Very likely Somewhat likely Somewhat unlikely Very unlikely
No income solutions 13.6% 54.2% 25.4% 8.5% 11.9% 66.1% 11.9% 74.0% 74.4% 82.9% 2012 2013 2011 20.0% 70.0% 50.0% 50.0% 59.3% 18.6% 10.2% 11.9% 10.0% 55.6% 20.6% 19.0% 4.8% 8.5% See page 28. Expected in 2015 0% 20% 40% 60% 80% 100% 2014
Increased proportion of active funds Increased proportion of passive funds Mix of active and passive remained the same 10.8% 83.8% 5.4% 27.3% 70.5% 2.3% Don’t know 4.7% No, but plan to add in 2015 11.2%
Don’t know Verbally, via benefits center Third-party advice provider Other mailed statement Participant statement Benefits website Yes 70.1% No 14.0% 80.0% 40.0% 16.0% 12.0% 1.3% Don’t know Other Third-party provider Plan sponsor Advice provider Recordkeeper 21.1% 6.6% 2.6% 2.6% Other Don’t know Annual income in retirement Balance at retirement Monthly income in retirement 69.7% 30.3% 3.9% 1.3% 6.7% 77.3% 22.7% 11.4% 22.7% n/a 0.0% 35.5% 60.5% 30.2% 7.0% 0.0% 30.2% 75.0% 10.5%16.3% 7.0% 0.0% n/a 81.4% 9.3% 2013 2014 2013 2014 2013 2014 See page 49.
About Callan Associates
Callan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have empowered institutional clients with creative, customized investment solutions that are uniquely backed by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises on more than $1.8 trillion in total assets, which makes us among the largest independently owned investment consulting firms in the U.S. We use a client-focused consulting model to serve public and private pension plan sponsors, endowments, foundations, operating funds, smaller investment consulting firms, investment managers, and financial intermediaries. For more information, please visit www.callan.com.
About the Callan Investments Institute
The Callan Investments Institute, established in 1980, is a source of continuing education for those in the institutional investment community. The Institute conducts conferences and workshops and provides published research, surveys and newsletters. The Institute strives to present the most timely and relevant research and education available so our clients and our associates stay abreast of important trends in the investments industry.
For more information about this report, please contact:
Lori Lucas, CFA, Defined Contribution Practice Leader or Jamie McAllister, Defined Contribution Consultant at 312.346.3536
Corporate Headquarters Callan Associates 600 Montgomery Street Suite 800 San Francisco, CA 94111 800.227.3288 415.974.5060 www.callan.com Regional Offices Atlanta 800.522.9782 Chicago 800.999.3536 Denver 855.864.3377 New Jersey 800.274.5878
