NEPC survey: DC plans challenged by booming retirement income market

Respondents to the 2022 survey included 119 clients representing $283 billion in aggregate assets and 2.2 million plan participants.

This year’s data showcases that retirement income solutions are more prevalent than what is typically discussed, with 84% of respondents currently offering their participants a retirement income solution - most often in the form of a Target Date Fund (TDF) that includes the flexibility to take installment withdrawals as a source of income in retirement. However, the survey also points to two major challenges for plan sponsors:

• There is still no consistency or real industry consensus on how to create meaningful retirement income solutions in pooled employer plans.
• A concurrent poll of NEPC consultants shows that retirement income solution selection is a pain point for many defined contribution clients. As the dedicated retirement income solution market has boomed over the past several years, many plan sponsors have struggled to evaluate their options strategically.

“As participants continue to demand retirement income solutions, plan sponsors are seeking trusted stewards to help them simplify what’s become a pretty complex evaluation and selection process,” said Alison Lonstein, Principal and Senior Consultant on NEPC’s Defined Contribution (DC) team. “This trend mirrors what we’ve seen in other segments of the retirement space - especially the increasingly complex ESG and legal environments. We’ve seen a significant uptick in clients asking for fiduciary training on the ESG landscape and requests for more insight and intel around legal news.”

NEPC’s 2022 survey also shows the continued dominance of TDFs in investment menus. Currently, 96% of respondents offer TDFs (unchanged from 2020) with 46% of total plan assets invested in TDFs (compared to 42% in 2020). While TDFs remain a popular option, plan sponsors are increasingly seeking guidance from investment consultants to help them better navigate rising scrutiny around these funds.

“Off-the-shelf and custom TDFs can have wide-ranging risk allocations, expenses, and best practices for management and reporting - something recent regulation and court cases are looking to address,” added Bill Ryan, Partner and Head of Defined Contribution (DC) Solutions. “As we’re likely to see continued focus on America’s retirement crisis in the years ahead, plan sponsors should be having hard conversations today about their fiduciary decision making and monitoring process for TDFs on their menu.”

Other key trends highlighted in NEPC’s new survey:

• Increased adoption of passive tier options: 2022’s data shows 83% of plans currently offer a passive tier (three or more index funds), an increase from just 66% in 2020.
• The growth of the DC plan OCIO market: As plan sponsors’ workforces and governance structures change, they are increasingly looking for OCIO solutions to streamline their plans. Throughout 2021, NEPC saw a 94% increase in OCIO assets (largely driven by a 17% increase in OCIO clients). Overall, 10% of NEPC’s DC clients are using the firm’s OCIO solution.

NEPC’s Defined Contribution (DC) team will discuss the survey’s findings during a webinar on Wednesday, March 8, 2023. Those interested in hearing how DC consultants are advising plans to address emerging opportunities can register for the webinar here.

The 17th Annual Defined Contribution (DC) Plan Trends and Fee Survey results can be downloaded here.

About NEPC, LLC

NEPC, LLC, is one of the country’s leading investment consultants and OCIO providers, servicing over 400 retainer clients with $1.4 trillion in assets¹ with $301.2 billion in alternative assets². Combining a proprietary research team dedicated to the long-term challenges facing investors with our unique client-centric model, NEPC builds forward-looking investment portfolios for institutional investors and ultra-high-net worth individuals. To learn more about NEPC, visit nepc.com.

1 As of 10/1/2022

² As of 12/31/2021, NEPC provides some form of advice to all clients counted but does not advise all clients on all asset classes.