Data & Research April 1, 2014

Tide Is Shifting Toward Custom TDFs

Defined contribution (DC) plan sponsors are evaluating their current target-date funds (TDFs) and considering whether or not custom TDFs are a better option, a survey shows.
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Of those plan sponsors already offering target-date funds, 12% currently use custom funds rather than proprietary or prepackaged options, according to recently published poll results from SEI. The poll suggests that the use of custom target-date funds is rising as more than one-third (37%) of those surveyed said their organization is likely or somewhat likely to implement or revise custom target-date solutions in the next 18 months.

Department of Labor (DOL) guidance issued last year suggested that plan sponsors offering proprietary or prepackaged target-date funds should consider custom or nonproprietary options (see “EBSA Offers Tips for Selecting TDFs”).

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“While there wasn’t a noticeable immediate response to the Department of Labor’s guidance by plan sponsors, the survey results suggest that tide is shifting toward evaluating custom or multi-manager TDF options,” says Scott Brooks, managing director of defined contribution for SEI’s Institutional Group. “This makes complete sense, as DC plan sponsors are recognizing that their fiduciary responsibilities have evolved and they need to focus on making sure the DC plan’s investments can provide participants with adequate retirement income.”

The push to provide participants with adequate retirement income could be the driving force behind changes to current target-date funds, the research suggests, but success metrics also need to change. Less than one-third (29%) of those surveyed said the organization measures the effectiveness of the investment options in the defined contribution plan by evaluating whether projected participant income replacement ratios are being met at retirement.

A vast majority (98%) of plan sponsors continue to measure effectiveness by reviewing investment performance, which tends to focus on short-term metrics such as three- and five-year performance, not long-term goals. The lack of focus on meeting retirement income needs comes despite the fact that nearly two-thirds (57%) of respondents said the objective of the company’s defined contribution plan was to provide a primary source of retirement income for employees.

Concerns around being able to effectively meet fiduciary and oversight responsibilities when implementing more sophisticated funds might be causing delays for some plan sponsors to shift to custom target-date funds. When asked why they do not currently implement such funds, nearly half (49%) said concern about added complexity and liability was a reason, while nearly one-third (31%) said they lack internal resources for implementation and ongoing oversight.

This might also explain why 42% said the organization would consider outsourcing investment manager selection in some areas of their defined contribution plan. Of that group, 43% said they would do so when implementing custom target-date funds.

The poll was conducted by SEI’s Defined Contribution Research Panel in February and was completed by 285 executives overseeing defined contribution plans in the U.S. For the complete poll summary, email seiresearch@seic.com.

Data & Research April 1, 2014

How Accurate Are Retirement Plan Coverage Stats?

New research indicates it is probably reasonable to say about 50% of private-sector workers participate in a retirement plan.
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However, an issue brief from the Center for Retirement Research at Boston College notes that the four major household data sets that provide information about pension coverage use different measures of coverage and participation and are subject to individual reporting error. For example, the Current Population Survey (CPS), produced jointly by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics, asks individuals two questions. First, did the employer you worked for have a pension or other type of retirement plan for any of its employees? And second, were you included in the plan? The survey does not gather any information about whether the plan was defined benefit or defined contribution.

In the CPS, the percentage of workers covered depends on two factors. These include 1) the definition of coverage—does the individual’s employer have a plan or does the individual participate in a plan?; and 2) the population group under consideration. Restricting the population to full-time wage and salary workers ages 25 to 64, including both public and private sector workers, and using employer sponsorship as the criterion, the CPS shows 63% of workers have the potential for participation in a retirement plan. At the other extreme, focusing on private sector workers only, using participation as the criterion, including both part-time and full-time workers, and eliminating the age constraint, the CPS shows only 38% are covered by a plan.

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According to the report, while pension participation has risen and fallen for short intervals, all four data sets show relatively stable participation rates over the period 1991 to 2012. The surveys suggest, over the last two decades, between 40% and 55% of private sector employees participated in some kind of retirement plan in any given year, with each data set suggesting slightly different levels of participation.

The issue brief points out that a look at the National Compensation Survey (NCS), an employer survey sponsored by the U.S. Bureau of Labor Statistics, indicates employers report a higher level of retirement plan coverage and participation than levels reported by employees. The NCS suggests nearly 80% of full-time workers have an employer that sponsors a retirement plan. The figure refers to full-time workers in both the private and state/local sectors. Virtually all (99%) full-time state or local government workers are offered a pension. Eliminate state and local employers and the coverage figure for full-time workers in the private sector drops to 74%. Add in part-time workers and the 74% drops to 64%.

In addition, only three-quarters of private sector workers who are offered a plan choose to participate. Thus, the NCS reports only 48% of private sector workers (including both full-time and part-time workers) participate in a retirement plan.

According to the issue brief, a 2011 study merging data from the Survey of Income and Program Participation (SIPP) from the Census Bureau with W-2 tax records shows participants may not understand their own situations. About 85% of SIPP households were matched with tax records, and the study found SIPP respondents in total underreported being offered a defined contribution plan by three percentage points and participating in a plan by five percentage points.

For example, with respect to participation, about 30% of respondents actively participated in a defined contribution plan and reported correctly, as verified by the W-2. About 14% self-reported incorrectly that they did not participate when the W-2 records showed they did. On the other hand, 9% of workers self-reported incorrectly that they did participate in a defined contribution plan when their W-2 record showed no tax-deferred contributions. The researchers assumed that the 9% reporting “false positives” were participating in a defined benefit plan.

Despite the discrepancies in data, retirement plan coverage is a problem in the private sector, the paper concludes.

The issue brief may be downloaded from here.

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