Client Service June 25, 2024

Many Participants With Company Stock Puzzle Over Use

There is need for more education in areas including retirement planning from equity compensation plans, according to Morgan Stanley at Work research.

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More employers are offering company stock or other forms of equity to workers. The only problem is that more than half aren’t sure how to maximize it for retirement savings, according to a report from Morgan Stanley’s workplace benefits and division.

As companies seek to offer enticing benefit solutions, 76% are providing some form of equity compensation benefits—a 12% jump since 2021, according to research released Monday by Morgan Stanley at Work. Fresh off its workplace benefits event, called Thrive, the firm noted that, despite the rise in equity benefits, many participants aren’t sure of how best to use them.

Among 2.3 million global stock plan participants, 61% said they don’t understand how to maximize the benefit, according to Morgan Stanley. Another 69% said they would likely attend sessions on the topic of equity fundamentals, 67% said they’d be interested to hear about retirement use and 64% would want advanced investing strategies.

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There are, however, signs of hope to address this, according to Scott Whatley, head of Morgan Stanley at Work. Surveying also found that 67% of participants would be “likely to attend a session on how to maximize their stock plan benefits for retirement.”

“There is a need for employers to help their employees translate their financial benefits into the real-world context of their individual financial goals, often while juggling competing priorities,” Whatley says. “While there is strong demand for workplace benefits such as equity compensation, there are often knowledge gaps that employers and providers can help address, such as how to utilize this benefit for long-term saving goals or retirement.

Further, he notes, employees ranked access to a financial adviser at the top of their list for most-wanted benefits.

“Given financial advice is often based on a holistic view of their client’s finances, financial advisers can be a great resource to provide guidance on if/how clients should connect their equity compensation benefits to long-term goals,” he says.

Morgan Stanley at Work has recently been working to connect with employees on various aspects of financial planning through the workplace, including to its national network for advisers. The division currently has over 24,000 corporate clients representing about 12 million participants. Its recent Thrive event held in Phoenix, where some of these findings were discussed, had more than 1,000 benefit professionals in areas including health, energy and finance.

Employers may be well-served to improve communication and education by tying equity compensation to other workplace benefits, according to the study. Morgan Stanley found in the survey that 56% of U.S. stock plan participants “said their equity benefits are one reason they have stayed at their company.”

At the moment, 45% of stock plan participants know how to reach someone if they have questions, and 31% said they have a personal financial plan in place, according to the researchers.

“Equity compensation can be complex, and even sophisticated executives may need support from professionals who are knowledgeable in specific areas—whether it’s taxes, 10b5-1 planning, portfolio reallocation, navigating regulations or making sense of unique company plan details,” Whatley says.

He recommends that employers consider a combination of communication methods to reach participants including digital and in-person support, self-guided education, “clear plan communication” and a “smooth” platform user experience.

“The key for companies is balancing the need for scalable benefits solutions with personalization so employees can find the right application in their individual situations,” he says.

Morgan Stanley at Work’s 2023 Annual Stock Plan Participant Survey comes from an in-house survey of 2.3 million active global Morgan Stanley stock plan participants (1.3 million in the U.S. and 980,000 non-U.S. participants) conducted on September 14, 2023, plus one reminder email.

Data & Research June 25, 2024

Capital Group Names Top Focus Areas for DC Investment Consultants

Evaluating plan needs and offerings for retirement income, TDFs and participant outcomes top the list for DC investment consultants for the next 12 months, according to a Capital Group study.

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Defined contribution investment plan consultants are focused on three areas that touch on the need to solve for the decumulation of assets by workplace retirement plan participants, according to recent research from Capital Group and its client analytics director, Chris Anast.

In a survey released May 13 of 15 DC investment consultants, Anast and team found the group’s top focus areas over the next 12 months are to revise or add retirement income options, implement target-date series “deep dives” and seek ways to improve participant outcomes.

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“I see all of these as somewhat related,” Anast says of the findings. “People are taking stock and trying to implement some sort of solution to solve for retirement income.”

The top area of focus, which was to “review existing or evaluate adding retirement income options,” was checked by 79% of the respondents. That represents a shift over the past 15 years to evaluate the “flood of products in the market,” says Anast.

This evaluation will not be easy. Anast notes the variety of factors in gauging and implementing retirement income options, including gaps in existing products and services, a perceived lack of portability and fees.

That complexity, he believes, led to the second area of focus being current TDF and qualified deferred alternative investment options, which was checked by 64% of those surveyed. Nearly all (98%) of consultants have a target-date series as the QDIA for participants, according to the survey, but evaluating those options may “be looking more at the decumulation phase” for the products, Anast says.

“They may be putting a little more on the recordkeepers to make sure they know how to offer [decumulation],” he says. “It’s very challenging for participants to understand it.”

To that end, a focus on participant outcomes tied for second in terms of focus areas at 64%, according to Capital itGroup.

All of the participants in the survey recommended that plan sponsor clients evaluate participant demographics to cater the investment options to their needs. Sixty-four percent advise annual review of demographics, with 36% being more flexible.

Other Focus Areas

Beyond the top three focus areas for clients, consultants next noted the SECURE 2.0 Act of 2022’s voluntary provisions (50%), recordkeeper evaluation (50%), participant engagement (36%), participant demographic analysis (36%) and cybersecurity (29%).

Overall, Capital Group found that most consultants (64%) recommend 10 to 14 investment options for DC plan clients, with mutual funds and collective investment trusts as the most common vehicles. Another 29% recommend five to nine options and 7% recommend 15 or more.

Most consultants surveyed (86%) advocate for retirement income options to be offered in a plan lineup, with half (50%) preferring both flexible and insurance-backed solutions. Anast is optimistic that retirement income solutions, including TDFs with an embedded annuity, will start to make their way into DC plans.

“The pickup rate is slow, but you are starting to see it,” he says. “So many of them are untested the market, and few people want to be the first actors.”

Some concern may come from litigation fears around trying new solutions—according to the survey, 86% of investment consultants make decisions frequently or sometimes based on legal concerns. A smaller 7% said they usually base decisions on litigation concerns, matched by 7% who never consider it.

Other worries included employer participation in offerings and recordkeepers ability to offer the solutions, according to Capital Group’s report.

Hybrid Solutions

In terms of the default TDF option for participants, the majority of consultants (64%) recommend a hybrid approach that combines both active and passively invested funds. Another 21% said they had no preference, but interestingly, no consultants chose only active.

This, according to Anast and team, shows a disconnect from plan sponsors, 21% of which in a separate survey said they implement active management.

“Most consultants highlight that active can add alpha over time,” he says. “The consultant is going to do what is best for their client—so the question is whether active management is going to cause an issue with the investment committee. If you have alignment, then they can look to an actively managed portfolio.”

Capital Group owns American Funds, which focuses on actively managed funds.

The survey also found that, despite the rise in more personalized investing, consultants don’t see customized target-date funds as the future. The vast majority (94%) of consultants use off-the-shelf target-date funds, with a smaller 64% also offering custom-date TDFs for clients. Meanwhile, another 50% of consultants see customized TDFs staying the same or even decreasing (14%) over time, with only 36% of them seeing them increase.

Anast believes that the lack of faith in more customized funds is because they may not provide enough personalization to make them worth the effort. More likely may be a continued increase of managed accounts, though only if the fees for services can prove to be worth it for participants.

“Everyone is looking at the appetite for how personalized [a plan sponsor] can get with a participant, from target-dates all the way to a full-blown managed account,” he says. “That is a question a lot of plans are turning over right now—is the customization meaningful, and if it’s not, why are you going to pay that fee?”

Capital Group’s 2023 Institutional Retirement Survey of Consultants was conducted online with 15 investment consultants from October to December 2023. The consultants had institutional assets under advisement ranging from $7 billion to $2.9 trillion.

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