Because our world has changed so dramatically, Callan’s annual Defined Contribution (DC) Trends Survey has evolved to fit the rapidly shifting landscape facing DC plan sponsors. The 16th annual DC Survey now covers SECURE 2.0 (pre-passage) and diversity topics, along with the key tenets of DC plan management, governance, and financial wellness. Some of the traditional activities we see in DC plans slowed in recent years while others required greater urgency, likely due to the twin forces of the pandemic and increased litigation.
Callan’s DC Survey provides a benchmark for sponsors to evaluate their plans compared to peers, and to offer actionable information to help them improve their plans and the outcomes for their participants. In this year’s survey, which was conducted in late 2022, respondents spanned a range of industries; the top were technology, government and financial services. Of the 99 respondents to this year’s survey, 81% offered a 401(k) plan, 27% a 457 plan, 16% a 401(a) plan, and 9% a 403(b) plan. Nearly three-quarters of respondents had more than $1 billion in plan assets. More than two-thirds of respondents were corporate organizations, followed by public (23%) and tax-exempt (9%) entities.
Other highlights from this year’s survey:
- Slightly more than half of respondents had a single committee to monitor and manage their DC plan, with the rest splitting the responsibilities between a separate investment committee and administrative committee. Most had an odd number of members to avoid tie votes. Investment committees had the most members on average (6.5) compared to administration committees (5.5) or single committees (4.8). Notably, public plans investment committees had the highest number of members on average (8.8), compared to corporate plans (5.4).
- The average tenure of committee members increased from 2017, with 36% in 2022 serving more than five years compared to 28% in 2017.
- While the pandemic changed the balance between virtual and in-person meetings, in general the total number of meetings of either type fell between 2017 and 2022. Instances of committees with only in-person meetings have increased slightly since return-to-office plans have been more widely adopted.
- We observed a sharp increase in respondents reporting that legal counsel attended meetings, with internal legal counsel attendance increasing from 11% in 2017 to 49% in 2022 and external counsel increasing from 21% to 36%.
- The top areas of fiduciary focus were plan governance and process; investment structure evaluation; and plan investment management fees.
- To measure the effectiveness of the plan, 96% of respondents used participation rate/plan usage.
- A majority of sponsors indicated an interest in expanding diversity, equity, and inclusion (DEI) efforts in their plans.
- Only 1 in 10 respondents formally tracked DEI metrics in their retirement plan, which may be due in part to the limits on the data collected by payroll or recordkeeper systems. However, 90% of respondents indicated they broke out retirement plan behavior by various groups that could support DEI initiatives.
- Few plans said they were currently planning changes to the investment fund lineup or plan design to support DEI initiatives.
Service Providers and Plan Fees
- 48% of respondents had a bundled arrangement, in which the recordkeeper and trustee are the same. The remainder had an unbundled arrangement, in which the recordkeeper and trustee are independent.
- More than 9 in 10 of plan sponsors engaged an investment consultant (retainer and/or project) in 2022.
- For governance and decision-making, all respondents used an investment policy statement. Committee/board charters were used frequently as well.
- Three-quarters of plan sponsors calculated their all-in administration DC plan fees within the past 12 months. Another 14% did so in the past two years. Similar levels were seen for trust and custody and investment management fees.
- When calculating all-in fees, more than half of respondents also evaluated sources of indirect revenue, such as revenue shared with the recordkeeper from managed accounts, brokerage windows, or rollovers of DC plan balances into an individual retirement account.
- More than 9 in 10 sponsors benchmarked the level of plan fees as part of their fee evaluation process.
- Nearly half of sponsors cut fees following their most recent fee review.
- Two-thirds of sponsors are either somewhat or very likely to conduct a fee study in 2023.
- Four in 10 respondents are likely to move to lower-cost investment vehicles in 2023.
- Roth deferrals (94%) and automatic enrollment (76%) were the most common enhanced savings features offered in 2022.
- Notably, 6 in 10 plans used a safe harbor plan design, meaning they are not subject to annual nondiscrimination testing, minimizing the impact of a failed test.
- Three-quarters of DC plans offered automatic enrollment. The vast majority used auto enrollment for new hires, while far fewer did it for existing hires.
- Half of plans used an auto enrollment default contribution rate of between 4% and 6%.
- Adoption of automatic contribution escalation continues to lag automatic enrollment, with 66% of plans offering the feature. The vast majority used 1% as their escalation rate.
- The average maximum escalation rate has increased notably in the past two years in response to the 2019 SECURE Act, which increased the maximum rate for automatic enrollment safe harbor plans from 10% to 15%. This was an optional provision, but nearly three-quarters of plans have set the maximum rate above 10%.
- Half of DC plans making a change to the matching formula increased the match in 2022, and another quarter plan on increasing the match in 2023.
- More than 90% of DC plans had a mix of active and passive investment funds. Purely passive (8%) remained a rarity, while no respondents had a purely active menu.
- Collective investment trusts (84%) and mutual funds (79%) were the most prevalent investment vehicles.
- Large plans were less likely to offer mutual funds in general and significantly less likely to offer mutual funds that are proprietary to the recordkeeper (26% of plans with more than $1 billion dollars in plan assets).
- In a drop-off from past years, only 35% of sponsors conducted an investment structure evaluation within the past year, while 81% have done so within the past three years.
- Only 16% of sponsors reported changing the number of funds in 2022. Roughly the same percentage indicated they are planning a change in 2023. Of those that made changes, the more common action was to increase the number of funds, while a decrease was slightly more common among those planning changes in 2023.
- In 2022, 97% of plans used a target date fund (TDF) as their default for non-participant directed monies, an all-time high.
- Among those that offer TDFs, over 8 in 10 used an implementation that was at least partially indexed. The share of active-only strategies was at its lowest point in survey history (15%).
- 52% of plans indicated they offered a target date suite only, while 45% offered the target date suite as the default along with managed accounts as an optional service.
Participant Advice and Managed Accounts
- Nearly all respondents offered general guidance, while more than 7 in 10 offered advice.
- Advisory services were at least partially paid for by participants for 90% of respondents.
- For plan sponsors with managed accounts, the vast majority (97%) offered them as an opt-in feature.
- Satisfaction with investment advisory services was generally high. Financial wellness tools and full financial planning received the highest overall marks, with 100% of respondents very or somewhat satisfied.
- The service with the largest percentage of dissatisfied respondents was guidance, with 9% of respondents reporting being somewhat dissatisfied.
- Financial wellness covers a myriad of concepts that help employees become financially fit and able to act intelligently with respect to their financial matters in all stages of life.
- Nearly 7 in 10 employers offered some financial wellness support.
- The top reason sponsors offered a financial wellness program (91% of respondents) was because it was an organizational philosophy to support employees.
- The top financial needs of participants were retirement savings, emergency savings, and budgeting.
- On a scale of 1-5, respondents judged their average program effectiveness at 3.5. Newer programs reported the lowest average effectiveness rate (3.0) while the most mature programs deemed their programs most effective (4.2).
- Half of respondents indicated the employer pays for the financial wellness program.
- There were nearly 100 provisions included in the SECURE 2.0 Act passed in 2022. The two initiatives of most interest to respondents were increasing the catch-up amount for older individuals and increasing the starting age for required minimum distributions to age 75.
- The 2019 SECURE Act allowed plan sponsors with an automatic enrollment safe harbor plan design to increase the automatic escalation cap to 15%. Of plan sponsors with such a plan design, 22% indicated they have or will increase the automatic escalation cap to 15%, and another 2% indicated they have or will increase the cap between 10% and 15%.
- 18% of respondents offered birth / adoption early withdrawals—a similar result from the 2022 DC Survey.
This blog post summarizes the key findings of our survey, but the full survey contains far more detail about all of these areas and extensive breakdowns of the data we gathered.