Employers looking to enhance 401(k) investment structures, Towers Watson survey finds

U.S. employers are enhancing the investment structures of their 401(k) plans, according to preliminary results of a 2014 Defined Contribution Survey by Towers Watson. This includes replacing single, stand-alone investment options with multi-manager, white-label choices, implementing custom target-date fund (TDF) solutions and outsourcing all or portions of their 401(k) plan oversight. The survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a defined contribution (DC) plan.

“Employers are taking a close, hard look at the investment structures of their defined contribution (DC) plans, given the impact plan structures can have on the retirement outcomes,” said Sue Walton, director in Towers Watson’s Investment business. “In addition, many plan sponsors are beginning to embrace more complex and sophisticated strategies and structures as the challenge of meeting participant and plan needs increases.”

Towers Watson found that 40% of the surveyed employers recognize that using a multi-manager, white-label investment strategy is a more efficient approach to active management than single, stand-alone active options. Additionally, about half of the respondents see the value of custom TDFs.
“Plan sponsors recognize that DC plans with investment lineups that include many single, stand-alone active funds are not the most efficient approach and have also produced subpar investment results for participants. Now, employers are looking at multi-manager, white-label options that promote fewer and simpler diversified options, which are more likely to lead to better outcomes,” said Walton.
According to the survey, 22% of plan sponsors have already implemented a custom TDF solution, while 27% may explore implementing one. “Plan sponsors are beginning to see the value in tailoring their TDF offerings. Unbundling the key decision points enables employers to align the glide path, portfolio construction and implementation of the funds to their plan objectives and participant demographics,” said Lorie Latham, director in Towers Watson’s Investment business. “We believe the Department of Labor’s release of TDF tips has influenced plan sponsors to evaluate custom TDF solutions as a viable alternative. Plan sponsors also understand the importance of their TDF offering and know they need to get it right.”

In addition, a growing number of plan sponsors are outsourcing the oversight of their DC plans. One-third of respondents currently delegate either all or a portion of their plans’ oversight, or may be interested in doing so.

“With DC plans now requiring more time and expertise from plan sponsors than ever before, it’s not surprising to see that outsourcing plan oversight is gaining traction,” said Walton. “As the investment opportunity set becomes increasingly more complex and the stakes get higher for the success of DC plans, employers need to consider the right governance equation, which may include seeking third-party partnerships.”

Source: Towers Watson press release, September 30, 2014.

Visit our News Library to read more news stories.