Shifting the DC Experience from Good to Great
Companies that stand the test of time are driven by a commitment to excel at every dimension of the business, including employee benefits. For one veteran Fortune 100 company, offering a default-led 401(k) investment menu wasn’t enough; leadership believed its participants deserved options that went beyond the basics.
Inspired by optimization, this firm revisited its defined contribution (DC) plan to ensure that it was fit-for-purpose, delivering carefully curated investment options to support participants in maximizing their retirement wealth.
A Different Participant Perspective
Sponsors have historically sought simple saving strategies for two reasons: 1) to engage every plan participant, including the least investment savvy, and 2) to protect the organization from litigation driven by participant confusion. From paternalism to protectionism, the decision makers’ objectives are logical, but the strategy of safety over sophistication can deprive participants of opportunities to make a meaningful difference in their wealth accumulation.
Not shying away from complexity, the firm in question opted for a different approach, one focused on delivering a finely calibrated investment menu and supporting participants in gaining the greatest value. It set about vetting this approach by testing the efficiency and effectiveness of its investment menu. Working with State Street Global Advisors, the firm undertook a plan ecosystem analysis in the summer of 2018 to assess:
- Plan design: Is the investment menu strong and diverse, does it offer the potential for wealth creation across a wide spectrum of risk appetites, and is it a good value?
- Participant behavior: Are participants using the menu effectively to maximize their retirement readiness?
Fine-tuning the 401(k) offering was not something the firm took lightly, as the retirement savings plan ranked as one of the most important and satisfactory components of its wide-ranging benefits program, according to an internal survey. In addition, account balances reflected a largely affluent and engaged workforce. Therefore, menu changes had to be sound so as not to risk tarnishing a benefits bright spot.
State Street Ecosystem Analysis
Using company-provided participant data and plan background information, State Street performed a collaborative and iterative ecosystem analysis to evaluate the firm’s existing investment lineup and map participant portfolios against the efficient frontier.
The State Street ecosystem analysis evaluates the investment options in a plan lineup and other plan design features, such as plan enrollment, employer and employee contribution rates, other retirement vehicles (including defined benefits plans) and participant decision making. This holistic view of the plan allows State Street to evaluate all of the “levers” available to a plan sponsor and identify the most efficient way of helping participants achieve their retirement goals.
To ensure recommendations for plan design customization benefit the full plan and validate the effort associated with change, they must be:
- Differentiating: Does this characteristic truly make the plan different from other plans?
- Impactful: Does this differentiating characteristic have a material impact on the population’s ability to meet retirement goals?
- Consistent: Is this differentiating characteristic consistent across the plan population or separable population subsets?
Through this work, State Street offered the firm insights on the current state of its plan design and participant behavior, and helped inform course corrections.
Plan Investment Menu
The firm’s DC plan features 22 investment options, organized into three investment tiers. The level of choice available is meaningful and enables participants to create highly personalized portfolios.
An efficient frontier analysis of the investment lineup revealed additional plan prowess. By mapping against an “unconstrained” efficient frontier, a clear picture emerged of the existing investment lineup offering robust exposure to key asset classes.
While participants had the tools to construct effective portfolios, Figure 2 illustrates how their performance lagged optimized returns. For some, this discrepancy was due to participants artificially constraining their risk budget while others simply had an opportunity to improve returns at a given level of risk. Note that as part of this analysis, State Street removed target date and company stock holdings to focus on core fund exposures.
Informed by State Street’s analysis, the firm saw an opportunity to nudge participants closer to the efficient frontier, giving its employees a better chance of meeting its targeted 70% replacement rate without dramatically increasing savings rates.
The firm has determined that tools and education, not a revision or reduction of the investment menu, will improve participant outcomes. In fact, funds were neither added nor removed based on the analysis. Instead, the sponsor will pursue the following improvements to promote retirement readiness:
- Target participant education on asset allocation to nudge participants closer to the efficient frontier.
- Implement an auto-rebalancing feature to help ensure that participant portfolios stay on track.
- Review the tools currently available to participants and determine if additional participant tools could be made available and would be beneficial to use in selecting and modeling core investment portfolios.
- Continue to solicit feedback from employees looking for improvements to the plan.
- Modify plan design to encourage 401(k) savings through increases to auto-enrollment, auto-escalation and company match.
The firm’s belief that its participant population can rise to the intricacy of its investment menu may seem like a disruptive concept for a workplace retirement plan, but in the consumer arena, it’s not new. Innovation in consumer technology did not stall at a perceived level of users’ tolerance for complexity. Instead, intuitive and engaging technologies have nurtured consumer capabilities, enabling people to confidently navigate a range of digital experiences and increasing opportunities for self-service.
Within financial services, and specifically retirement investing, the rise of robo-advice has been a well-tread topic, as it promises to increase savers’ access to insights at lower costs. Research from Cerulli Associates finds investors’ openness to “robos” has increased as recently as 2015, with investors seeing digital intelligence as a kind of diversification beyond analog advice.1 Digital insights can take the form of tools modeling the portfolio effects of contribution or investment changes or dashboards offering access to additional resources.
We see these themes trending globally in State Street’s 2019 Global Retirement Reality Report (GR3), in which we spoke to retirement savings plan decision makers in the United States, United Kingdom, Ireland, Australia and the Netherlands. Across the markets, 75% of plan decision makers cited the ability to access advice as the attribute participants valued most in a retirement savings plan, ahead of ease of use (73%), low costs (67%) or investment design (46%). By complementing digital platforms with human advice, sponsors have opportunities to balance efficiency with judgment, support more informed investment decisions and facilitate better outcomes.
Mirroring a corporate philosophy defined by the pursuit of precision, the firm profiled here has stayed true to the retirement savings objectives of plan design strength — offering a high-quality, diverse investment menu — and informed participant engagement — maximizing retirement readiness efforts. Leveraging data, modeling and constant curiosity to explore and enhance its offering without sacrificing quality and complexity, the firm has found its formula for success by daring to see differently.
1 Zulz, Emily. “Older, Wealthier Investors May Be More Into Digital Advice Than You Think,” ThinkAdvisor, February 15, 2018. https://www.thinkadvisor.com/2018/02/15/older-wealthier-investors-may-be-more-into-digital/