Employers Look to Enhance 401(k) Investment Designs

More companies eyeing custom target-date funds, outsourcing plan oversight

By Stephen Miller, CEBS Oct 3, 2014

With millions of workers now relying on 401(k) plans as their primary retirement savings vehicle, U.S. employers are enhancing the investment structures of those plans, according to a new survey by Towers Watson. This includes implementing custom target-date fund (TDF) solutions and outsourcing all or portions of their 401(k) plan oversight.

The Towers Watson 2014 Defined Contribution Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a defined contribution (DC) plan. According to preliminary survey results released in September 2014:

40 percent of surveyed plan sponsors believe a multimanager, “white-label” investment strategy is a more efficient approach to active management than single, stand-alone active options.

“Plan sponsors recognize that DC plans with investment lineups that include many single, stand-alone active funds are not the most efficient approach and have also produced subpar investment results for participants,” said Sue Walton, director in Towers Watson’s investment business. “Now, employers are looking at multimanager, white-label options that promote fewer and simpler diversified options, which are more likely to lead to better outcomes.”

22 percent of plan sponsors have implemented a custom TDF solution, while 27 percent say they may explore implementing one.

“Plan sponsors are beginning to see the value in tailoring their TDF offerings,” said Lorie Latham, director in Towers Watson’s investment business. “We believe the Department of Labor’s release of TDF tips has influenced plan sponsors to evaluate custom TDF solutions as a viable alternative. Plan sponsors also understand the importance of their TDF offering and know they need to get it right.”

One-third of respondents currently outsource all or a portion of their plans’ oversight, or may be interested in doing so.

“With DC plans now requiring more time and expertise from plan sponsors than ever before, it’s not surprising to see that outsourcing plan oversight is gaining traction,” said Walton.

Design and Communication

Looking at the overall results, Walton concluded that “Employers are taking a close, hard look at the investment structures of their DC plans, given the impact plan structures can have on the retirement outcomes. In addition, many plan sponsors are beginning to embrace more complex and sophisticated strategies and structures as the challenge of meeting participant and plan needs increases.”

But Alan Hahn, a partner in the Benefits & Compensation Group at Davis & Gilbert LLP in New York City, doesn’t agree that the problem of less-than-optimal participant returns can be blamed solely on poor plan design. “Oftentimes, an unimaginative 401(k) plan design is really the victim of a poor employee communication effort,” Hahn said in a September 2014 Fiduciary News article. “Think about the most important thing that helps employees save for retirement. It’s the simple act of getting enrolled in the plan and starting to save. … What’s missing is the education piece. Getting employees engaged so they understand the value of saving, and then giving them the tools to get there.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.​

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