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.
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.