Survey: Benchmarks for Defined Contribution Plan Design

By Stephen Miller Feb 18, 2010

Keeping 401(k)-type defined contribution (DC) plans competitive, even in economically challenging times, remains important to attract and retain talent. To help plan sponsors benchmark plan design features, PensionDCisions, a provider of research and advice about defined contribution (DC) plans, released an inaugural U.S. Survey on DC Default Design and Plan Characteristics in February 2010. The survey looked at 65 large plan sponsors, representing 1.7 million active participants and $163 billion in assets. Two thirds of these companies are listed in the Fortune 500.

"As service providers compete for market share, pressure will increase for them to better understand customer needs and better demonstrate the value of their solutions," comments Graham Mannion, managing director of PensionDCisions. "In parallel, the decision-making process for plan sponsors and participants is becoming more complex, making it more difficult to connect with the most appropriate solution. Rigorous insight into the risk-adjusted performance actually delivered to end consumers will enable all parties to make better decisions."

Below are highlights from the survey findings:

Asset Allocation and Performance

On average, equities (stocks and stock funds) account for 81 percent of portfolio asset allocation during the growth stage, 72 percent at 15 years from retirement and 50 percent at retirement.

Over the three years preceding September 2009, the average annualized return was -3.0 percent during the growth stage, -1.8 percent during the pre-retirement phase and 0.6 percent at retirement.

Actively managed funds generated higher returns than passive (index) funds over the preceding year but underperformed passive over three years.

Interrelationship Between Service Providers

In the service categories of investment consulting (recordkeeping and investment management), a small group of providers holds the lion's share of relationships.

The involvement of a particular service provider, such as the record keeper or investment consultant, can steer plans toward very different designs and outcomes. For example, selection of an investment consultant has a material relationship with use of active management and customized solutions. Selection of a record keeper has a material relationship with the choice of investment manager.

Default Solution Design

72 percent of plans use an off-the-shelf target-date fund. In approximately half of these cases, the fund is selected from the same entity that provides recordkeeping services.

13 percent of plans use a customized solution for target-date funds or other qualified investment default alternatives. For many of these, there is a lack of transparency regarding the underlying product composition and performance. Plans using a customized default solution have, on average, $2.3 billion in assets.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Most U.S. Companies Plan to Restore 401(k) Match in 2010, SHRM Online Benefits Discipline, February 2010

Auto Enrollment in 401(k) Plans Led to Higher Match Rates, SHRM Online Benefits Discipline, February 2010

Target-Date Funds Receive Greater Scrutiny, SHRM OnlineBenefits Discipline, June 2009

401(k) Stats: Benchmarks for Plan Sponsors, SHRM Online Benefits Discipline, October 2009

SHRM 2009 Employee Benefits Survey Report, SHRM Research, June 2009

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