3 Ways Leading Plan Sponsors Enhance Target Retirement Strategies

Watch our Global Head of DC, David Ireland, discuss three target retirement strategy innovations that leading plan sponsors are using to unlock plan value:

  • Bespoke investing strategies for unique employee populations
  • Automatic plan design features for better plan engagement
  • A focus on collective investment trust structures

David Ireland
Global Head, Defined Contribution

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As one of the world's largest investment managers, we believe we have an obligation to understand and solve for investor needs. As a result, the core to our strategy is putting clients and their employees at the center of this strategy and taking time to sit back and listen and gain fresh perspectives. Here are three ways that leading plan sponsors are innovating.

First, focusing on the default—plan sponsors are increasingly
recognizing that their target dates solution needs to tie to any unique plan
characteristics. So the way we've been engaging with plan sponsors has been to do what we refer to as an ecosystem analysis, where we're looking at individual age cohorts and trying to understand if there are any meaningful,
differentiated, and consistent factors that need to be adjusted for. Performing this exhaustive analysis is simply good hygiene from our perspective.

In some instances, plan sponsors will decide that no change is necessary. In other instances, we'll identify a factor that's meaningfully different from a standard assumption that will warrant reconsideration of the default investment. Second, leading plan sponsors are increasingly
understanding that automatic features win.

We've seen plan sponsors embracing things like automatic enrollment and auto escalation. Others are taking it a step further, and they're doing things like automatically re-enrolling their population on an annual basis, nudging participants, moving them in the direction that's going to be best for them from a behavioral perspective, pushing them towards the default, where outcomes simply are better. Lastly, we've been seeing plan sponsors focusing on cost.

How can they take cost out of this system? Now, this can be fees, but it also can be vehicles. Are there ways that you can add a vehicle? Can you move away from a traditional mutual fund construct to something like an ERISA collective fund.

ERISA collective funds typically offer a better fee structure, better trading, and better dividend recapture. Now, this is a bit of a nuanced point. But if you look at a traditional international equity fund, an ERISA strategy versus a mutual fund, the ERISA collective is going to capture 20 basis points of additional value from dividend recapture. 20 basis points over a 20-year period? Compounded, that's 5% of additional growth. Over the life of a savings plan, that could be tens of thousands of dollars in increased wealth for the participant.

At the end of the day, defined contribution plans are becoming the primary retirement savings vehicle for the majority of Americans. And we're encouraged by the fact that leading plan sponsors are taking time to innovate. And we're going to continue to listen.


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EXP: July 31, 2020