David Kennedy, Cerulli senior analyst for retirement, said there’s no question employers are emphasizing new and improved retirement plans as a perk for potential employees.
“Today, plan providers are placing these programs front and center in their value propositions to current and prospective clients and these companies have invested significant amounts of time and resources in transforming them into high quality interactive and personalized experiences,” Kennedy said. “In doing so, plan providers hope to deliver value by offering effective financial guidance to participants that have a real chance of addressing employee financial challenges and the related stress, poor decisions, and decreased work performance that can result.”
Kennedy said employers and financial service firms have identified retirement plans as areas of opportunity for further growth and value-added services beyond their historical roles of simply managing retirement assets, partly due to improvements in technology over the last several decades.
Other changes taking place is the adoption of the relatively new PEPs – pooled employer plans for small business – which were created by the SCURE Act of 2019. About 26% of survey respondents said they are currently serving as a pooled plan provider (PPP) for a PEP, a roughly 10-percentage-point increase compared to 2021. About half of 401(k) plan sponsors are familiar with the basic structure of a pooled employer plan. However, 38% of respondents indicated they are not familiar with PEPs.
“Large plan sponsors are more familiar with PEPs than small plan sponsors suggesting that greater PEP education must be disseminated to the small plan market,” the report said.
The PEP market is still in its early days, Kennedy noted.
“PEPs are the latest and greatest experiment in the retirement industry to help make offering plans to smaller businesses more economical and help resolve the ‘retirement gap’ – the phenomenon of small businesses in the US being significantly less likely to offer retirement benefits to their employees compared to larger employers,” he said.
Moreover, workers and retirees are demanding improvements to retirement plans, Kennedy said, which accounts for a wide variety of features and offerings from employer to employer.
“The is significant variation among retirement plan providers in terms of what allowances they make for participants to withdraw funds from their employer-sponsored plan account once they have retired/separated from the employer,” he said. “There is a current trend in the industry of some retirement plan providers making efforts to provide more robust in-plan benefits for retirees.”
Overhaul may be needed
However, he said, given the survey results, it’s clear that as currently structured many firms’ plan distribution policies/personnel/infrastructure may need to be overhauled in order to accommodate the wide variety of distribution preferences that retirees will likely demand.
“Plan sponsors, consultants, and asset managers looking to implement more progressive plan design features, including flexible, low-cost distribution options, personalized investment solutions, and non-traditional investment products, will turn to their record-keeper to facilitate these implementations,” the report states.
About 33% of record-keepers offer personalized target-date funds on their defined contribution platforms, the Cerulli report said. “These types of investment strategies offer the scalability of target-date funds in providing professional money management to plan participants, while also allowing for adjustments to underlying investments and/or glide paths based on a collection of data points that are particular to each individual investor.”
Much of the asset growth in the IRA market is attributed to rollovers from defined contribution plans,” Cerulli said. “Rollovers accounted for $2.9 trillion in IRA asset growth between 2016 and 2021. The sharp market downturn in 2022 should place downward pressure on IRA rollover balances in 2023, the report said, resulting in slightly higher net flows into corporate DC plans.
“Furthermore, the auto-enrollment and auto-escalation provisions within SECURE 2.0 and ongoing legislative and market efforts to expand workplace retirement plan coverage may facilitate stronger contribution growth in the years ahead,” said Shawn O’Brien, Cerulli associate director.
Cerulli’ s voluminous report incorporates qualitative and quantitative inputs based on the company’s proprietary research process, Cerulli said.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].
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