Sponsors Focus on the Long Term

A recent T. Rowe Price report uncovers how defined contribution (DC) plan sponsors are evolving their views of certain retirement-related risks and objectives.  

According to the survey, “Advancing the Way We Think About Retirement Risk and Outcomes,” the largest concern among plan sponsors includes participants’ longevity risk (with 42% of plan sponsors indicating this as their top worry), and the capacity to gain greater retirement account balances over the long term, when selecting target-date strategies or other qualified default investment alternatives (QDIAs) for participants.

During the selection process for QDIAs, the survey found DC plan sponsors prioritize risks towards long-term objectives. However, small DC plan sponsors have a higher sensitivity towards short-term objectives.

Thirty-five percent of plan sponsors said “reducing point-in-time downside return” is their top consideration when selecting a QDIA. Yet, 65% of respondents believe scoring the highest retirement income opportunity is a greater priority.   

“Being an effective plan sponsor today requires an expansive view of the risks and influences on the growth of a participant’s portfolio,” says Lorie Latham, senior defined contribution strategist at T. Rowe Price. “This survey reveals that plan sponsors clearly understand that longevity risk–the risk that participants will outlive their retirement income–is a critical factor in determining retirement readiness, and that their investment choices must be designed accordingly.”

Additionally, the risk of unfavorable sequence of returns (SoR) was cited as a reason for favoring lower equity target-date allocations among plan sponsors, the survey finds. However, T. Rowe Price says these findings suggest plan sponsors “consider risk in a broader context,” including the possibility that a “lower equity target date glide path may fail to provide sufficient growth needed for participants to accumulate adequate savings for retirement.”