Guiding Defined Contribution (DC) plans through economic cycles is challenging enough without harsh headwinds from a global health crisis. But more plan sponsors are getting invaluable expert help to navigate through current challenges while keeping a long-term perspective.
Support for third-party expertise was rising well before the outbreak. About 58% of plan sponsors rely on some level of consultant or financial advisor expertise, according to our latest Inside the Minds of Plan Sponsors survey—up 16% from our prior survey. We define both the consultant and advisor roles as offering a distinct skill set in the areas of plan design, help with choosing service providers, and selecting and monitoring investments. Each role provides unique value to sponsors, but for simplicity’s sake, we’ll refer to both as consultants.
From Investments to Education—What Consultants Deliver
We think the growth in sponsor-consultant partnerships stems from a growing sense of purpose. Seven of 10 plan sponsors identified themselves as fiduciaries (previously 58%), and securing consultants’ expertise can help them fulfill their responsibilities. Further, more than half (54%) of sponsors said it’s “very important” to have a consultant act as a fiduciary, up from 37% in our last survey.
Consultants help in diverse ways—from investment review to education—and sponsors value just about all of it, especially if it provides actionable intel. Plan financial integrity is another growing priority, which explains why 61% of respondents who use a consultant now rely on them for investment advice as fiduciaries. About half said their consultant provides discretionary investment management services, versus 35% in our prior survey.
Sponsors highly value second opinions, too, with six in 10 saying they want them for an objective check on the handiwork of their plan’s other service providers (Display). And 42% of plan sponsors (up from 27% previously) said consultants are their fallback if something goes wrong; while sponsors are fully responsible, leveraging third-party input goes a long way to show best intentions.
Why Some Plan Sponsors Go Solo…or Keep Switching
Not all plan sponsors use consultants—some feel comfortable handling the plan on their own. Among sponsors who go it alone, trying to justify the added expense was a top reason for not working with consultants, although the percentage declined to 40% from 47% previously. Others felt their plan’s interests weren’t the first priority (31%, up from 20%).
Among plan sponsors who use consultants, some change them more frequently. About 34% reported making a change, up from 25% in our prior survey. Understandably, sponsors have high bars and sometimes third-party experts aren’t the right fit. But running a plan is tough in normal times, let alone during a once-in-a-century crisis. We think consultants, when carefully selected to meet clearly defined goals, can help plans find success.
Design, Features, ESG? Consultants Help with Worries
With so much responsibility, naturally there are plenty of things that can keep plan sponsors up at night. They said that foremost among their concerns is a lack of participant knowledge about how much to save for retirement (Display).
But problems are solvable, and consultants can be great partners to address the likes of financial wellness, plan fees, litigation, leakage and rising separation amid a wave of delayed retirements. Outside expertise can also assist in comparing plan options. Most sponsors know what they want to achieve, but it boils down to distinguishing among all the different choices.
Retirement income solutions, for example, are top of mind for most sponsors. About half say they’re thinking about adding a guaranteed income option to their lineup, and many can benefit from some help with understanding the available solutions.
The same goes for collective investment trusts (CITs), a particularly cost-effective vehicle that just half of plan sponsors said they offer (62% for bigger plans). A little guidance from experts—many of them well-versed in CITs—may be all it takes for more sponsors to appreciate their merits.
Responsible investing is on the radar too—along with many questions. Participant demand is growing for environmental, social and governance (ESG) plan options and some sponsors are incorporating them, but some struggle to distinguish among the raft of choices. Consultants are out front on this, especially in making sense of new US Department of Labor guidelines on ESG plan integration—something we believe is fundamental to better financial outcomes and always in the participant’s best interest.
These and other dynamic shifts aren’t unfolding as rapidly as the pandemic, but their potential impact on plans is expansive. Sponsors don’t have to go it alone. Many welcome and value expert “second opinions,” but still more should consider their added value, not just to navigate the pandemic, but for other challenges sure to come.
Jennifer DeLong is Head of Defined Contribution at AllianceBernstein (AB).
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.