A survey conducted by Callan LLC found that defined contribution plan sponsors were particularly concerned about their governance, DEI efforts, cutting plan fees and upgrading their plan design over the past year.
Callan’s 16th annual Defined Contribution Trends Survey, conducted at the end of 2022, did not show any dramatic changes to the DC plan landscape, according to Jana Steele, a Callan senior vice president, but here are some of the most notable trends to come out of the survey:
Sharp Increase in Usage of Legal Counsel
Largely due to increased litigation in 2020, Callan observed a “sharp increase” in plan sponsors reporting that legal counsel attended meetings.
Internal legal counsel attendance at committee meetings increased from 11% in 2017 to 48% in 2022, and external counsel increased from 21% to 36% in that same span, according to Callan’s survey.
Steele says there are multiple different theories as to why a significant amount of litigation came out of 2020. As a result of the pandemic, many were not employed by the same employer and needed additional funds, so they were more willing to sue at that time, Steele speculates.
“I would say [the increase in legal counsel] is a direct reaction to the litigation that we’ve seen, as well as just ensuring that the processes that the planning committee and fiduciaries are undertaking are satisfactory from an ERISA prudence standard,” Steele says.
Increased Interest in DEI, but Lack of Action
While a majority of plan sponsors indicated an interest in expanding diversity, equity and inclusion in their plans, Callan found that only one in 10 respondents formally tracked DEI metrics within their plan.
According to the survey, this may be due to the limits on the data collected by payroll or recordkeeper systems.
Steele says when employers are looking at their employee base and tracking demographics, they do not typically collect information like sexual orientation, ethnicity, race or gender identity, because it may not be readily available.
“When you’re trying to track that different groups perhaps take out more loans or different groups are better savers … a lot of times the data is just not there in a way that can be regularly or efficiently gathered,” Steele says. “It’s the same thing with recordkeepers: They won’t track that level of information.”
However, 90% of survey respondents said they broke out retirement plan behavior by various groups that could support DEI initiatives. Age was the most common lens for plan sponsors to review plan behavior, followed by tenure and gender, the survey showed.
Meanwhile, few plans reported they were currently planning changes to their investment fund lineup or plan design to support DEI initiatives.
“We did see a lot of interest, especially among larger plans, in expanding DEI, and I think that is an area that will continue to develop over the next five years,” Steele says.
Nearly half of sponsors cut fees following their most recent fee review, and more than nine in 10 sponsors benchmarked the level of plan fees as part of their fee evaluation process, according to Callan’s survey.
The percentage of plan sponsors that did not know whether plan fee levels were benchmarked (2%) also dropped from prior years.
But only four in 10 respondents said they are likely to move to lower-cost investment vehicles, such as moving from an R6 share class to a collective investment trust, in 2023. This is a notable decrease from one year prior, when 58% of sponsors said they would move to lower-cost investment vehicles in 2022.
In addition, only 4% said they have begun to rebate excess revenue sharing to participants. This is a relatively low percentage, according to Callan, which can likely be attributed to the portion of plans which report no revenue sharing (50%) from the fund lineup.
Investment management fees were most often paid entirely by participants (85%), and 67% of all administrative fees were paid entirely by participants—up significantly from two years ago (49%).
Increase In Roth Deferrals, Automatic Enrollment
The most common enhanced savings features offered in 2022 included Roth deferrals (94%) and automatic enrollment (76%).
Callan found that that about 75% of plans offered automatic enrollment, and the vast majority offered auto– enrollment for new hires, while far fewer did it for existing employees.
Automatic contribution escalation lagged behind automatic enrollment, as only 66% of plans offered the feature.
Steele says this is likely because auto– escalation was not a requirement until the automatic enrollment safe harbor came into being.
“There was a feeling that perhaps employees would not like that, all of a sudden, their paycheck decreases slightly every year,” Steele says. “But if participants don’t like [the auto-escalation feature], they can turn it off.”
With the maximum escalation cap for automatic enrollment safe harbor plans increasing from 10% to 15% under the Setting Every Community up for Retirement Enhancement Act of 2019, Steele says she thinks more plan sponsors were willing to consider the feature. This was an optional provision, but nearly three-quarters of plans have set the maximum rate above 10%.
“I think the lag comes because plan sponsors suffer from inertia as much as participants do,” Steele says. “Making a plan design change isn’t top of mind until they have to make a plan design change.”
Steele predicts Callan will see more dramatic trend changes in future surveys, especially because the SECURE 2.0 Act of 2022 mandates auto-enrollment and auto-escalation for new 401(k) and 403(b) plans.
Of the 99 respondents to Callan’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.