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What Trends Are Impacting DC Plan Investment Menus?

Practice Management

NEPC is out with its 2021 Defined Contribution (DC) Plan Trends and Fee Survey, examining current plan investment trends and innovations across major sectors.

While target date funds (TDFs) continue to be the “turnkey solution,” NEPC notes that one of the more prominent developments is that menus are moving toward index funds. In 2021, 44% of respondents had plan assets invested in TDFs, compared with 28% in 2011. In addition, 97% of plans offer TDFs and 95% of 2021 respondents are using TDFs as the plan default. 

As for index funds, the study shows that 38% of plans currently offer index TDFs, up from 34% in 2016, and 70% of those plans offer a “tier” of three or more index funds in their core menu. The median percentage of plan assets invested in index funds is 15%. Meanwhile, active TDFs dropped from 58% in 2016 to 46% in 2021, while blended TDFs increased from 8% in 2016 to 12% in 2021. “The significant uptake of target date funds is helping to transform the market in meaningful ways,” says Bill Ryan, Partner and NEPC’s Head of Defined Contribution (DC) Solutions. “Investment managers are now evolving their TDF offerings to include payout features or spending guidance.”

Managed Accounts

Meanwhile, adoption of managed accounts has remained flat for the past three years, which is counter to expectations given the strong marketing promotion by recordkeepers, NEPC notes. According to the firm’s data, the percentage of plan offering managed accounts stood at 38% in 2021, which is up from 36% in 2020 and 28% in 2017. For both the percent of plan assets investing in a managed account service and the percent of participants enrolled in such service, the survey median was 7%. 

Noting that it may be too early to call it a trend, the firm adds that it is starting to see more clients consider removing managed accounts than adopting them. Nonetheless, “Overall, we feel that at a reasonable fee level, managed accounts can be a useful solution to help participants meet individualized objectives,” the study emphasizes. 

Custom Options

While impending U.S. regulatory updates could lead to increased adoption of retirement income and ESG investment options in 2022, NEPC further observes that the data from 2021 highlights current gaps in guaranteed lifetime income and ESG menu options. Last year, only 6% of plans offered an ESG or socially responsive labeled option, but the firm anticipates increased adoption when the regulatory landscape softens. Many active managers are also starting to consider ESG within security selection, the firm notes.  

In addition, nearly all respondents currently offer the makings of a “retirement tier,” but most plans lack an option providing guaranteed lifetime income. The study shows that only 1% of plans offer an investment option with guaranteed income for life. Still, the firm predicts that guaranteed income solutions and ESG will progress slowly in 2022.  

Meanwhile, certain plan types can graduate into custom solutions or white label fund for better use of risk management, broadening mandates or introducing new asset classes or niche managers as fixed operational costs become less of a burden, NEPC notes. The report shows that the prevalence of white label funds by plan size:

  • under $500 million (2%)
  • $500 million to $2 billion (16%)
  • $2 billion to $5 billion (40%)
  • $5 billion and up (58%)

Additional findings show that:

  • 99% of plans offer a capital preservation option; 
  • 88% of plans offer installment payments (per plan rules);
  • Only 2% of plans offer a managed payout fund;
  • 63% of plans offer self-directed brokerage accounts, rising from 60% year over year;
  • 50% of plans’ recordkeepers have an out-of-plan annuity marketplace available;  
  • the average number of core investments is 11; and
  • 39% of plans offer TIPS, REITs or other type of inflation-sensitive investment option.

In addition, while less than 1% of plans offer dedicated private markets, NEPC suggests that alternatives like private equity, private real estate and hedge funds make sense as part of a professionally managed multi-asset option.

“Because the Great Resignation placed immense stress on the retirement ecosystem, flexible features and purpose-driven investment options are now deal-breakers and deal-makers,” Ryan emphasizes. “This survey helps illustrate how plan sponsors are looking for consultation beyond simple ESG negative screening and TDF ‘best practices.’ Plans are looking for partners to advise them on new opportunities in 2022 and beyond.”

Conducted online by NEPC’s Defined Contribution Practice Group, this year’s survey included 137 DC plans (68% corporate, 25% health care and 8% public, not-for-profit and Taft Hartley respondents) representing $230 billion in aggregate assets and a total of 1.6 million plan participants.