Top considerations for defined contribution plans in 2023
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Top considerations for defined contribution plans in 2023
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Summary
Defined contribution (DC) plans are at a Mercer’s 2022 Inside Employees’ Minds Survey found
that covering financial needs has jumped to the highest
significant turning point. Looking through employee concern, and that 73% of workers across the
an employer and employee lens, there is income spectrum say high inflation and market volatility
a pronounced shift to empowering plan are causing financial stress. Heightened awareness of
the wealth gap and questions of equity and inclusion
participants through accessibility and are sparking regulatory changes focused on bolstering
personalization to support the goals of retirement coverage for historically underserved workers.
retirement security and financial stability. Demographic data allows sponsors to customize their
programs with greater sensitivity to diversity, equity
Digital innovation is accelerating the and inclusion (DEI) and in greater alignment with their
journey toward a more curated and holistic organizational needs. Tackling these issues while still
approach. As revealed in Mercer’s Global balancing regulatory changes, fiduciary responsibilities and
vulnerabilities is a challenge for many organizations, but
Talent Trends 2022 Survey, people no longer especially those facing turnover in their benefit teams.
want to work for a company. They want to
work with a company. Forward-thinking The focus on workforce management, the greater
complexity of running a retirement plan and staffing issues
employers need to prioritize the “whole- at all levels are causing many organizations to consider a
person” wellbeing needs of their people. change in historical practices.
This paper offers sponsors many
opportunities to align DC plan features,
practices and investments with these more
personalized needs.
Here are five themes to consider as you plan for 2023.
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2. The regulatory agenda
1. Make it about me
More relatable organizations and equitable
The future of tools and technology
retirement systems
3. Staying out of the spotlight 4. Highs and lows
Minimizing risk in a litigious environment Inflation and financial markets
5. Making space
Freeing staff resources to work on other things
© 2022 Mercer LLC. All rights reserved.
3 Top considerations for defined contribution plans in 2023
1. Make it about me: The future
of tools and technology
There is an opportunity for the DC real time. We also see machine learning being harnessed
in the design of customized online and app-enabled
industry to expand personalization experiences for participants who can engage them based
of the user experience to further on their individual decision-making patterns. Plan sponsors
will need to balance the benefits that technological
advance financial wellness. developments can bring to participant engagement with
As millennials and Gen Zers make governmental communication and privacy requirements.
up more of the workforce, their Personalization could also benefit the retirement income
expectations and strong preferences space, which to date has been difficult to deliver to
participants. Formulating and implementing appropriate
for a consumerized digital experience drawdown strategies is complex and time consuming, with
will move to the forefront. recordkeepers and managed account providers needing
participants to share personal financial details and make
There remains a significant opportunity to improve and predictions with limited insight (e.g., Will I live to 85 or
integrate the user interfaces of recordkeeping platforms 95? What will market returns or inflation be 20 years from
with financial wellbeing solutions for participants. now?). Expansion of target date solutions that incorporate
guaranteed income or managed payout features could
Specifically, virtual experiences — such as user interface be increasingly important pieces of the income puzzle,
design — and machine learning will have profound impacts especially if paired with technology solutions that analyze
on participants’ financial journeys. In the future, we can participant data and the need to optimize the hundreds, if
even see virtual reality offering connected, personalized not thousands, of ways a participant can draw down their
financial advisory and coaching services to participants — in collective savings and retirement benefits.
© 2022 Mercer LLC. All rights reserved.
4 Top considerations for defined contribution plans in 2023
In anticipation, the managed accounts landscape is quickly Independent managed account providers are expanding
evolving. We are seeing a rise in recordkeepers launching their reach to broader financial wellbeing services in direct
proprietary managed account solutions in competition competition with some recordkeepers. As this push-and-pull
with independent providers, which raises the questions evolves, we anticipate that the more innovative providers
of flexibility, portability and consistency of experience, in who strike the right balance between automation and
addition to broader implications for possible conflicts of personalization will see the greatest adoption by sponsors
interest and understanding true revenue sources. and participants.
Sponsors should consider:
• Conducting a retirement income • Clarifying fiduciary responsibilities for • Weighing differences between
needs evaluation for participants participant services in writing (advice managed account offerings to
versus education), with investment understand their potential value
• Reviewing general communications
decisions and distribution decisions versus cost
and educational resources issued by
being top of mind
the recordkeeper, including target • Discussing technology roadmaps with
audiences • Evaluating the benefits of solutions recordkeepers to understand what
that address personalization needs potential offerings could improve
• Personalizing communications;
retirement readiness
younger generations respond better • Assessing data provided to
to deeper personalization the recordkeepers to facilitate • Testing tools regularly made available
personalization and determine how by recordkeepers
that personalization is delivered
© 2022 Mercer LLC. All rights reserved.
5 Top considerations for defined contribution plans in 2023
2. The regulatory agenda:
More relatable organizations and
equitable retirement systems
The SECURE 2.0 Act of 2022 broader benefits and talent strategy. Examining participant
demographics, especially by assessing needs through a
(SECURE 2.0) was recently signed into diversity lens, can provide helpful direction on which
law and is top of mind for many plan provisions may be most impactful. Furthermore, overcoming
the wealth gap for Black, Indigenous and people of color
sponsors. It further encourages long- (BIPOC) populations continues to be an issue that will require
term savings while expanding short- time before systemic change is realized.
term access in an attempt to minimize Companies seeking to evaluate the needs of their workforce
financial burdens that employees face require data, some of which may be difficult to obtain or could
during challenging financial times. raise privacy concerns. Employers need to balance business
and people imperatives through the structure
of their benefit programs. How can employers effectively
This legislation encourages employers to look at the purpose incorporate DEI considerations into their retirement
and design of their DC plan so that it meets their participants’ programs? How can data and privacy challenges be overcome
current and future needs as well as their overall organizations’ to empower more equitable plan design? We see an
goals. Mercer’s own research shows that only 34% of opportunity to use demographic analysis to inform employer
employees feel financially secure today and for the future.1 contribution decisions as well as optional withdrawal and
distribution provisions, such as penalty-free withdrawals for
Some of SECURE 2.0’s mandatory provisions will help drive terminal illnesses or long-term care insurance. Both design
toward more equitable retirement systems, in part by features may help close wealth gaps, some of which are
accelerating and expanding coverage for part-time workers. driven by turning to high-interest debt and loans when
Many optional provisions within SECURE 2.0 aim to provide emergency savings aren’t available.
financial flexibility and access to assets when under financial
stress; traditionally, these assets have been difficult or costly A well-publicized provision in SECURE 2.0 is the ability
to tap. This dynamic approach may make long-term savings to offer employer matching contributions on student
more palatable and could potentially help mitigate systemic loan debt repayments. While we see the value of this
inequities. provision, we recognize that it serves the needs of a specific
population. Similar match designs may also be feasible and
While most provisions are not yet effective, plan sponsors merit consideration, such as making employer matching
should be considering which provisions will benefit their contributions into the DC plan on HSA deferrals.
population and how to frame their decisions within their
1
Mercer, Global Talent Trends 2022.
© 2022 Mercer LLC. All rights reserved.
6 Top considerations for defined contribution plans in 2023
Affording healthcare costs outside of insurance is a challenge
for employees, especially low-income earners, according to
Mercer’s 2022 Inside Employees’ Minds Study. When it comes to
the intersection of retirement and healthcare, 38% of employees
said they would find employer matching contributions on HSA
contributions attractive.
Sponsors should consider:
• Conducting demographic analysis to • Evaluating optional SECURE 2.0 • Understanding the impact that some
understand how different cohorts of provisions to determine which of plan design changes may have on DEI
participants are using plan design and them may best help address gaps initiatives around benefit offerings
investment features, and to identify within current benefit design
gaps and opportunities
• If optional SECURE 2.0 provisions are
adopted, how to educate employees
to promote desired outcomes and
monitor those outcomes
© 2022 Mercer LLC. All rights reserved.
7 Top considerations for defined contribution plans in 2023
3. Staying out of the spotlight:
Minimizing risk in a litigious
environment
As cyber threats and fraud attempts It also uncovered potential new risks associated with DC
plan management, which in some cases has raised the
related to DC plans and participants possible need for broader insurance coverage. While
mount, accompanied by an active there currently are no requirements for employers to have
cyber or data security insurance, plan sponsors may find
plaintiff’s bar around these issues, supplemental coverage necessary or useful depending on
sponsors should evaluate the risks the types of guarantees made by third-party vendors.
and coverages afforded by third-party Insurance for DC plans has become increasingly complex.
Sponsors are facing increased fiduciary liability insurance
vendors (e.g., recordkeepers). premiums and stricter underwriting when renewing
In 2021, the Department of Labor fiduciary liability policies. Driven largely by litigation risk,
fiduciary liability policy rates have increased from 15%
(DOL) released guidance on to 20%,2 and fiduciaries are being asked more nuanced
cybersecurity best practices related questions about their governance processes. Plan sponsors
deemed as not answering these questions appropriately
to DC plans that sparked deeper have seen even higher increases in policy rates, or in
inquiries by sponsors and fiduciaries some instances have been denied coverage outright.
Plan sponsors should evaluate their plan’s governance
into their vendors’ security practices. procedures ahead of renewals, as once the renewal
process is underway, it may be too late to make necessary
adjustments or take action to avoid significant increases in
premiums, or even be denied coverage.
When it comes to executing plan administration, sponsors
are also struggling with turnover among experienced
benefit teams. Staff turnover often results in knowledge
and experience gaps exacerbated by insufficient
documentation. Beyond internal turnover, recordkeepers
are also experiencing staffing challenges. The result can
be disruption in participant servicing, or even worse,
compliance issues that increase costs or further stress
resources. Well-documented administrative practices,
executed by temporary staffing resources, may be an
appropriate short-term solution for impacted sponsors.
2
https://www.marshmma.com/us/insights/details/the-state-of-the-fiduciary-liability-insurance-market.html February 2022
© 2022 Mercer LLC. All rights reserved.
8 Top considerations for defined contribution plans in 2023
Sponsors should consider:
• Evaluating cyber and data • Conducting recordkeeper • Reviewing vendors’ cybersecurity
insurance coverage, including fee benchmarking studies warranties to identify limitations/
third-party vendor guarantees approximately every three years conditions (i.e., checking accounts
and RFPs, when appropriate every 90 days) and negotiating
• Reviewing governance processes
commitments in the recordkeeping
and establishing or refreshing • Assessing investment strategies
service agreement (often not
fiduciary governance calendars for lower-cost vehicles and share
addressed)
classes at least annually
• Ensuring that administrative
practices are compliant and • Taking advantage of institutional
well documented vehicles, such as collective
investment trusts (CITs) and
separate accounts
© 2022 Mercer LLC. All rights reserved.
9 Top considerations for defined contribution plans in 2023
4. Highs and lows: Inflation
and financial markets
Within investment menus, inflation protection options
Most plan participants have never
have taken on greater importance, and we believe they
experienced a market environment will continue to play a key role in a diversified investment
with inflation hitting multi-decade lineup. In this sharply rising inflation and interest rate
environment, Treasury Inflation Protected Securities
highs and equities and bonds (TIPS) have struggled to provide inflation protection
experiencing negative returns at for participants. Portfolios diversified with real assets
the same time. historically have weathered inflationary and market
volatility better and have highlighted the need for including
Furthermore, employees could have assets outside DC diversifying asset classes managed in a risk-controlled way.3
plans that carry significant risk, such as individual stocks
and cryptocurrency that may be causing even greater Additionally, alternatives such as private equity and credit
financial anxiety. Grappling with rising costs of living and as well as private real estate and unlisted infrastructure
seeing their savings fall sharply, workers are stressed and may provide notable relative protection in a multi-asset
looking for a safe haven. We believe plan sponsors will (e.g., target date) construction, as the following chart
need to examine investment menus from a more holistic demonstrates using three possible paths forward for the
perspective that helps solve their workers’ overall financial economy: stagflation, a hard landing or a soft landing.
needs and insecurities.
3
Past performance does not guarantee future results. Investing in real assets entails specialized risks and may impose higher costs on investors.
© 2022 Mercer LLC. All rights reserved.10 Top considerations for defined contribution plans in 2023
Three-year expected real return by scenario (USD)
Year-to-date Possible paths forward
Asset class
Extreme overheat Stagflation Hard landing Soft landing
Inflation (annual rate) 8% 7% 2% 4%
2Y US Treasury Rate (EOP) 4% 4% 1% 3%
Developed equities -30%
Emerging market equities -31%
High yield* -20%
Sovereign bonds* -19%
Inflation-linked bonds* -18%
Listed real assets** -14%
Private real assets** 1%
Commodities 6%
Gold -16%
-10%+ -10% to -6% -6% to -2% -2% to 2% 2% to 6% 6% to 10% 10%+
Source: Mercer, MSCI, ICE, Bloomberg, S&P, Burgiss, LBM; scenarios as of 30 June 2022 with definitions in appendix. Year-to-date equally weighted returns
through 27 September 2022 for listed, 30 June 2022 for private. *Using US High Yield, Treasuries and TIPS. **Real assets are equal weighed accross real estate,
infrastructure and natural resources. Private assets are modelled as core. Listed real assets suffer more than private assets in stress scenarios due to their
correlation with equalities in the near term. As the periodicity increases, the correlation increases with their private counterpart and decreases with equities.
The shading of the various categories illustrates the
benefits that private assets could have relative to
traditional equities and bonds, particularly in stagflation
and hard-landing situations. This exhibit is shorter term
in nature, but the key point of diversification benefits
persists across longer time periods, which is often the
focus for retirement plan fiduciaries.
© 2022 Mercer LLC. All rights reserved.11 Top considerations for defined contribution plans in 2023
While alternatives are not commonly found in DC plans, ERISA 3(38) fiduciary models continues at a healthy pace,
exposure may be offered through target date funds. As as sponsors can benefit from tapping into the specialized
the current market environment highlights the need for expertise from this type of fiduciary model. Many employers
diversification beyond traditional equities and bonds, we are already considering outsourcing some or all of their
believe fiduciaries should be examining their investment investment management decisions and day-to-day
lineup for opportunities to enhance offerings to better plan administration, as Mercer’s own research shows.
serve a multitude of market environments. We are seeing Additionally, as SECURE 1.0 paved the way for pooled
the investment management industry focus its efforts employer plans for corporate DC plans, we anticipate that
on designing private market vehicles that are more SECURE 2.0 will further expand adoption of this outsourced
flexible for use with DC plans. We anticipate that this
investment and administrative solution with 403(b) plans.
trend will continue.
In a departure from plan sponsor surveys conducted before
For some DC plans, the administrative, operational the COVID-19 pandemic, 78% of corporate executives
or oversight complexity of alternatives may produce globally now say the pandemic made them realize that their
challenges relative to the investment case. However, in companies need to outsource investment management;
those situations, outsourcing may provide a good solution. 20% would outsource investments in the face of another
Adoption of outsourced chief investment officer (OCIO) market downturn.4
Sponsors should consider:
• Evaluating participant needs • Looking for opportunities • Whether a change in governance
through demographic and to enhance diversification model might bring about
behavioral analysis to provide through real assets/diversified additional opportunities to access
better support to participants inflation funds or private market private markets or more complex
on how to access and use alternatives investment structures that would
investment options benefit participants over the
long term
4
Mercer, Global Talent Trends 2022.
© 2022 Mercer LLC. All rights reserved.12 Top considerations for defined contribution plans in 2023
5. Making space: Freeing staff
resources to work on other things
Against a backdrop of high inflation One reason is time poverty: 50% of plan sponsors indicate that
they are spending less time than they would like
and the prospect of recession, already- on their retirement plans.5 Competing in a new war for talent
in the face of the Great Resignation at all staffing levels,
lean benefit teams have had to pivot multiple reorganizations and now “quiet quitting,” benefit
from a traditional benefits strategy to professionals may find it challenging to manage an individual
DC plan. Adding to this sense of “one more thing to do” is the
one that their workforces are never-ending complexity of the DC space itself. Litigation risk
demanding to be more consumable, and pending regulatory guidance on multiple fronts, such as
environmental, social and governance (ESG) issues,
fair, inclusive and representative cryptocurrencies and cybersecurity, make it difficult for benefit
of their values. And, despite the teams to focus strategically rather than dealing with day-to-
day aspects of managing their plan.
significant gains that have been made
Resource constraints reinforce the need for good, well-
over the years in what employees documented governance, which is something an OCIO
value as one of their most important provider experienced in managing large asset pools and
enterprise risks can support. At the same time, personnel
benefits — their retirement plan — changes are encouraging large institutions to pursue partial
many plan sponsors have concluded or full investment outsourcing relationships to allow the team
to focus on new business or strategy goals, or to make up for
that a DC plan is complicated, risky knowledge gaps around DC plan oversight and administration.
and inefficient to manage. Partial, full or expanded DC outsourcing not only lessens
investment monitoring, decision making and fiduciary risk, but
also can reduce time spent on plan administration, reduce
legal costs and provide expert support on managing
expanding fiduciary roles. We are already seeing corporate DC
plans look to the most expanded form of outsourcing through
Pooled Employer Plans (PEPs), a trend that we anticipate will
continue in 2023 for the aforementioned reasons, in addition
to the door being further opened to 403(b) plans now that
SECURE 2.0 has passed.
5
Two Mercer surveys of approximately 200 retirement professionals, June and August 2020.
© 2022 Mercer LLC. All rights reserved.13 Top considerations for defined contribution plans in 2023
Sponsors should consider:
• Preparing for expected talent • Whether a change in governance • Working with an OCIO provider
shortages due to high performers model could provide additional who can be thoughtful about DC
retiring early or leaving benefits beyond investment option innovation while customizing
selection or vetting of service outsourced solutions to support
• Balancing expanding fiduciary
providers; PEPs may offer the the needs of unique participant
demands with business needs
widest breadth of outsourcing populations
© 2022 Mercer LLC. All rights reserved.14 Top considerations for defined contribution plans in 2023
Conclusion
The need for greater personalization In addition, sponsors should consider which provisions
under SECURE 2.0 will benefit their population, and how
of the user experience reflects growing to frame those within their benefits and talent strategy
expectations among younger workers for the year ahead. Increasingly expensive fiduciary
liability coverage is emblematic of an increasingly litigious
for a consumerized digital experience, environment, as the plaintiff’s bar is expanding its focus
and there remains a significant from fee and investment suitability issues to more nuanced
areas of cybersecurity and governance. Furthermore,
opportunity to improve and integrate against a backdrop of growing investment complexity and
platforms with broader financial inflationary pressures, plan sponsors will need to look at
investment menus from a more holistic perspective that
wellbeing solutions for participants. helps solve for their workers’ overall financial needs and
insecurities. Lastly, internal resources are being stretched,
encouraging organizations to look at partial, full or
expanded DC outsourcing approaches — many in earnest,
and for the first time. With the challenges and opportunities
ahead in 2023, thoughtful strategic planning will propel
DC plan sponsors toward potentially bringing the greatest
benefit to participants while balancing resources.
© 2022 Mercer LLC. All rights reserved.15 Top considerations for defined contribution plans in 2023
If you would like to discuss the findings within this report in more
detail or how we may be able to support your organization, please
contact your Mercer consultant to learn more.
Katie Hockenmaier
CFA, CIPM, Partner
katie.hockenmaier@mercer.com
Amy B. Reynolds
amy.reynolds@mercer.com
Holly Verdeyen
holly.verdeyen@mercer.com
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