Assessing the State of Defined Contribution Plans Today
Inside the Minds of
Plan Participants and Sponsors
Research Insights
„„ With
retirement confidence low among workers,
their desire for secure retirement income is high
„„ Target-date
funds continue to grow in appeal
and use, especially as a “through retirement”
DC plan solution
„„ When
aligning a large DC plan’s objectives and
strategies, customized target-date funds may
prove especially useful in making a plan
durable and adaptable for the long term
There is no guarantee that any forecasts or opinions in this material will be realized.
Information should not be construed as investment advice.
Investment Products Offered • Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed
Investing in a target-date fund does not guarantee sufficient income in retirement.
About AllianceBernstein’s Defined Contribution Research
AllianceBernstein’s Defined Contribution (DC) team has conducted annual surveys
of employees since 2005 as well as biannual surveys of plan sponsors since 2006.
These snapshots help us understand the attitudes and behaviors of workers toward
retirement saving, the changing state of DC plans and the concerns of plan sponsors.
We want to share this research with plan sponsors. We believe it will help them
understand how to lead participants to better savings outcomes and more
comfortable retirements. Our research also helps us enhance our DC plan solutions to
better serve the objectives and strategies of DC plans—large, medium or small.
Our eighth annual web-based plan participant survey was conducted in February
2012, and included a national sample of 1,002 respondents who were full-time
employees, 18 years of age or older, and worked for companies that offered DC
plans, such as 401(k)s.
Our latest plan sponsor survey, fielded in November 2011, was also web-based
and included a national sample of 1,018 respondents. It contained the following
representation from all plan sizes:
Segment
Plan Size by Assets
Number of Respondents
Small
<$1 Mil.
207
Mid
$1 Mil.–$249.9 Mil.
608
≥ $250 Mil.
203
Large
For reporting purposes (unless otherwise indicated), we pooled the responses of plan
sponsors with assets from $1 million to $250 million because their answers tended
to be highly similar. However, the responses from small-plan sponsors (with less than
$1 million in assets) and large-plan sponsors (with assets of $250 million and more)
were sometimes significantly different from those of the other groups.
At the end of our surveys, we asked plan participants and sponsors for any further
thoughts they might like to share. We’ve included some of our respondents’ comments
as highlighted quotes in the upper right-hand corner of pages throughout this paper.
“Target date” in a fund’s name refers to the approximate year when a plan participant
expects to retire and begin withdrawing from his or her account. Target-date funds
gradually adjust their asset allocation, lowering risk as a participant nears retirement.
Investments in target-date funds are not guaranteed against loss of principal at any
time, and account values can be more or less than the original amount invested—
including at the time of the fund’s target date. Also, investing in target-date funds
does not guarantee sufficient income in retirement.
Working Toward Better Futures…
for Plans and Participants
The largest generation in US history is moving into retirement just as traditional retirement-funding vehicles seem
to be running out of steam. Even so, AllianceBernstein is optimistic that a bright future lies ahead for constructing
better retirement outcomes.
Retirement: A Work in Progress
The Freedom to Save…or Not to Save
The historical road to retirement has constantly changed
over the past century. And, if anything, the pace of change is
accelerating. So defined contribution (DC) plan sponsors and
plan providers need to be prepared for a world where the key
to success is adapting to the changing retirement landscape—
and the changing needs of participants.
In general, DC plans have now become the primary retirementsavings vehicle for workers. These plans give workers the
freedom, control and tax-favored incentives to take an active
part in saving for their retirement. But that freedom comes
with a cost: few workers have a clear sense of how much they
need to save, so they simply don’t save enough.
Past Solutions
Adapting to the 21st Century
Social Security and defined benefit plans (DB) were the
retirement mainstays for the twentieth century. Both
were conceived at a time when the average life span was
far shorter than today, and they often provided financial
security for the minority who lived beyond age 65. But living
conditions and life expectancy have steadily improved, making
the costs of government- and employee-sponsored retirement
income guarantees increasingly difficult to bear.
Once again, we have to evolve our approach to retirement
savings. To do that, AllianceBernstein uses our plan participant
and plan sponsor surveys to better understand the obstacles
and the practical possibilities for helping DC plans gain the
flexibility to adapt well—whatever the future may bring.
In the following pages, we’ll share some of our important
insights into what participants need, and what plan sponsors
think will help them deliver successful DC plans.
On the horizon: Potentially putting security back in retirement
Plan Type
Pros
Cons
Retirement Income
Pay-as-You-Go
(Social Security)
Lifetime income
Risk pooled
Government backing
Longevity vs. funding risk
Yes...historically
DB
Lifetime income
Risk pooled
No portability
Sponsor backing
Funding most required when sponsor is weak
Yes...for now
DC Now
Portability
Low cost to sponsor
Low risk to sponsor
Poor returns
No risk pooling
No lifetime income
No
DC Future
Lifetime income
Risk pooled
Portability
Low cost to sponsor
Low risk to sponsor
Insurer backing
Yes
1
Hurdles and Help for Plan Participants
Most workers have never been particularly confident about retirement­— nor adept at saving and investing wisely.
But simplicity and automation can help overcome behavioral hurdles. Target-date funds can play a big part.
Is a “Comfortable Retirement” an Oxymoron?
In the eight years we’ve conducted our participant surveys,
workers have never been particularly confident about
having a comfortable retirement. Even at the peak of market
performance in 2007, just 41% were confident. For the last
few years, that has declined to around 25%.
It may well be that confidence won’t rise significantly until
we have an adequate replacement for the lifetime guarantees
inherent in pensions and Social Security. For now, few workers
feel they will be comfortable in retirement because they
doubt that Social Security will help as much as it has in the
past. They’re also concerned because they don’t want to be
dependent on anyone and they don’t feel they’ll have enough
money to live at the same level as they do today. But do these
concerns translate into better planning and saving?
Fluctuating Confidence…but Consistent Attitudes
While our participant surveys have shown investor confidence
may rise and fall over the years, participant attitudes toward
investing have remained remarkably constant. In fact, over the
course of our eight-year research period, just over one-third
of survey respondents regularly classify themselves as “Active
investors” who start saving early, have confidence about their
current financial situation, and actively manage their investments
or the managers that invest for them. Nearly two-thirds of our
respondents consistently say they’re “Accidental investors” who
are unenthusiastic about saving and investing, are insecure
about their current financial situation, and lack confidence in
any investment ability.
These hardwired behaviors simply don’t change, and they
dominate participants’ relationships to DC plans. That’s why
automatic enrollment and a qualified default investment
alternative (QDIA) are so important: Accidental investors
prefer to be guided into the default.
Target-Date Funds Can Help
The Department of Labor (DOL) has designated three
diversified, all-in-one investment solutions—such as targetdate funds—as defaults that DC plans can safely use with
automatic enrollment. This helps to steer workers into saving
early and investing sensibly.
Few workers see a comfortable retirement as a reality
“Are you confident you’ll have a comfortable retirement?”
41%
27%
29%
25%
24% 26% 25%
18%
2005
2006
2007
2008
2009
2010
2011
The great investor divide: two distinct
attitudinal categories
Active
Investors
„„Enjoy
investing
„„More
confident
38%
Accidental
Investors
62%
2012
% of Employees Who Are Confident/Very Confident
Source: AllianceBernstein Research, 2012
2
Inside the Minds of Plan Participants and Sponsors
Source: AllianceBernstein Research, 2012
„„Reluctant
to
invest/save
„„Lack
confidence
“Because of market and economic
volatility, I spend less, stay home more
and worry about the future.”
Target-date funds have taken the lead as the default of
choice for DC plans, and usage among participants has
continued to increase. In our 2012 survey, 39% of Actives
and 27% of Accidentals said they invest in target-date funds.
We suspect that actual usage may be higher, especially with
Accidentals. That’s because 23% of our survey respondents
said they didn’t know if they were investing in target-date
funds, which likely implies that they were automatically
invested in their plans’ defaults.
Target-date fund use keeps growing…
39%
29%
Active
Investors
22%
Accidental
Investors
27%
21%
16%
The Appeal of Target-Date Funds
Accidentals value the simplicity of investing in target-date
funds: they have to answer only one question to get going
(“when do I want to retire?”), and all subsequent asset
allocation and rebalancing decisions are taken care of for
them. Active investors also choose target-date funds—but
for different reasons. These typically hands-on investors
recognize that target-date funds keep them appropriately
invested for retirement, and they feel comfortable that
they’ve made a good choice.
Target-Date Satisfaction Is High
Along with increased usage, target-date fund performance
has been getting very high marks: 87% of Actives in
target-date funds are more or equally satisfied with their
performance in comparison with other funds in their DC
plans, and 72% of Accidentals feel that way, too. It’s worth
noting that in 2009, only three-fourths of Actives and half of
Accidentals were equally or more satisfied with target-date
funds­—and after three extraordinarily difficult years for the
markets, target-date satisfaction has kept climbing.
2005
2009
2012
Source: AllianceBernstein Research, 2012
…and satisfaction levels are high
“How satisfied are you with target-date fund investment
performance in comparison with other funds offered within
your plan?”
More Satisfied
49%
38%
Equally Satisfied
Less Satisfied
Not Satisfied
with Any
Don't Know/
Can't Say
7%
2%
5%
More Satisfied
28%
44%
Equally Satisfied
Less Satisfied
11%
Not Satisfied
with Any
2%
Don't Know/
Can't Say
“Target date” in a fund’s name refers to the approximate year when a
plan participant expects to retire and begin withdrawing from his or her
account. Target-date funds gradually adjust their asset allocation, lowering
risk as a participant nears retirement. Investments in target-date funds are
not guaranteed against loss of principal at any time, and account values
can be more or less than the original amount invested—including at the
time of the fund’s target date. Also, investing in target-date funds does
not guarantee sufficient income in retirement.
Active
Investors:
87%
Accidental
Investors:
72%
14%
% of Target-Date Fund Users
Numbers may not sum due to rounding.
Source: AllianceBernstein Research, 2012
3
The Limits of Education
Plan sponsors put a lot of time, attention and budget into education and communications for participants, but is it all
paying off? Our surveys indicate the need for something more.
Education and Communication: Useful, but
No Panacea
The majority of participants­­—Accidentals—say they don’t
enjoy investing, they typically invest only as participants in a DC
plan, and they don’t pay much attention to what they invest
in. They invest inconsistently and lack confidence in their ability
to make good investment decisions. All the education and
communications provided won’t likely change that. But even
Active investors may have difficulties with investment principles.
That’s because investing simply isn’t simple. And many people
don’t have the time or the desire to learn something that
doesn’t directly enhance their current job performance or career
prospects. So we shouldn’t expect that access to investment
education will turn participants into investment pros.
We got a good gauge of the limits of education when we asked
participants several basic questions about target-date funds.
Most Participants Understand the Target-Date
Glide Path…
We wanted to know if participants understood the concept
of the target-date glide path: “True or false: target-date funds
become more conservative as you get closer to retirement.”
A solid two-thirds correctly said this was true. Fortunately,
only 13% said this was false, but another 20% opted to
answer “don’t know.”
We hadn’t expected so many to take a pass on answering a
true-or-false question. But whether that reflects their doubts
or their honest lack of understanding, this is a basic precept
of target-date funds that is constantly communicated in
target-date literature. While it’s always possible to improve
communications, it’s unlikely that we’ll see any substantive
improvements in understanding as a result.
4
Inside the Minds of Plan Participants and Sponsors
On a related question, 63% correctly understood that targetdate funds, at retirement, are invested in a mix of stocks and
bonds. But there was still a disturbing 22% who said they
didn’t know.
…but Many Wrongly Believe Their Account Balance
Is Guaranteed…
The next true-or-false question we posed to participants
revealed a misperception about target-date funds that may
point to a misperception about investing in general. The
statement said: “If you invest in a target-date fund, your
account balance is guaranteed to never go down.” Essentially,
there’s no stock or bond investment that can’t go down.
Traditional target-date funds may be diversified, but they’re
still investments in the capital markets.
Participants grasp the glide path
“Target-date funds become more conservative as you get
closer to retirement.”
Don’t Know
True
20%
False
13%
67%
% of Respondents
Source: AllianceBernstein Research, 2012
“I worry that employers
are not helping employees manage
their retirement issues effectively.”
Only 43% of our participant survey respondents correctly said
this statement of a guarantee was false. More than one-third
said it was true, and nearly one-fourth said they didn’t know.
We find it worrisome that nearly 60% of plan participants
don’t understand that target-date funds, or any investments
for that matter, can go down—especially after the market
turmoil of the credit crisis.
Target-date funds, like any investment, can go down
“If you invest in a target-date fund, your account balance is
guaranteed to never go down.”
Don’t Know
23%
…and Many Wrongly Expect Future Income
Our participant survey tested the statement that “targetdate funds guarantee that you will meet your income needs
in retirement.” Again, that’s something that isn’t possible
without some form of insurance attached to that investment.
But 37% of respondents said that statement was true, and
22% said they didn’t know if it were true or false. That leaves
only two-fifths of DC plan participants recognizing that
today’s target-date funds don’t guarantee retirement income.
True
34%
43%
False
% of Respondents
In large part, we believe that these misperceptions mirror the
difficulties of being “amateur” investors: it’s tough enough
doing our day jobs, and most participants lack the time,
motivation or skill to become investment experts.
Source: AllianceBernstein Research, 2012
We encourage plan sponsors and communications providers
to include prominent disclosures that target-date funds do not
guarantee sufficient income in retirement.
“Target-date funds guarantee that you will meet your income
needs in retirement”
Misplaced expectations
Don’t Know
True
22%
37%
41%
False
% of Respondents
Source: AllianceBernstein Research, 2012
5
The Missing Link to Confidence
DC plans provide freedom and choice in how participants approach retirement savings. But there’s no certainty that
those savings will last through retirement. Without that certainty, workers’ efforts to save will continue to suffer
from a lack of confidence.
Wishful Thinking
Strong Appeal for Secure Income Target-Date Funds
Perhaps the fact that many participants believe their
DC account is guaranteed reflects a strong dose of
wishful thinking. We believe it points to what participants
truly want: a steady retirement income stream that they
can count on. That’s what pension plans and Social Security
deliver. But pensions are increasingly a thing of the past,
and Social Security is facing political and funding difficulties.
We delved deeper and asked respondents if they’d like a
target-date fund with a secure income stream feature. Nearly
80% of current target-date users found this appealing or
extremely appealing. Over half of target-date nonusers
agreed, as did nearly half of nonplan participants.
What Participants Want
While only a minority of workers feel they’re experienced
investors, most strongly agree on what’s most important to
them in a DC plan. We presented survey respondents with a
list of nine features and benefits, asking them to choose the
ones that were important to them. The top pick was a steady
income stream in retirement. And that choice was uniform for
Actives and Accidentals, participants and nonparticipants—
and for all age groups.
What’s notable is that lifetime income is not only participants’
top choice, but it wins by a 20-percentage-point margin over
all the other choices.
The single most important feature to participants
is missing
Our survey uncovered a further, very interesting point
on this topic for plan sponsors who want to increase
participation in their plans. We asked target-date nonusers
and nonplan participants how they’d feel if their employer
automatically invested their contributions into a target-date
fund with a secure income stream feature. Again, over
half of target-date nonusers were receptive to this. But the
surprise was that 62% of nonplan participants said they
would stay invested—a much higher percentage than the
49% of nonplan participants who would be interested in
investing in a traditional target-date fund.
Strong interest in lifetime income
“How appealing is a target-date fund with a secure income
stream feature?”
79%
“What do employees want most from their DC Plans?”
53%
Top features and benefits
47%
67%—a steady income stream in retirement
47%—protection of principal
41%—withdraw all or part of my money with no fees or penalties
at any time
39%—invest in a well-diversified mix of investments
Source: AllianceBernstein Research, 2012
6
Inside the Minds of Plan Participants and Sponsors
Target-Date Users
Target-Date
Nonusers
Nonplan
Participants
% Rating as Appealing/Extremely Appealing
Source: AllianceBernstein Research, 2012
“I want to make sure I have
enough to last me comfortably
through the rest of my life.”
What’s My Number? Making Retirement Personal
by age 80. But more than half of 65-year-old males today will
likely live past 85—many past 90. And women’s life spans are
even longer. Workers need to understand their likely annual
retirement income, rather than just their accumulated savings.
There’s another missing link participants need for retirement
confidence, and that is knowing how much they can
withdraw each year from their nest eggs. The vast majority
of employees have no idea what level of spending their
retirement account can safely afford them. When we asked
our respondents what a reasonable percentage would be
to spend each year, a startling 71% either guessed too high
(49%) or said they didn’t know (22%).
How can plan sponsors and the DC industry help correct this
dangerous misconception? Here, a very specific improvement
to communications may prove highly beneficial: a personal
forecast of spending potential based on their current balance,
prominently displayed on each participant’s quarterly account
statements. We asked our respondents if they’d value such a
forecast, and over 92% of them said yes. There’s a clue here
to a broader perspective on how to help communications and
education get through: Make it personal. Such personalization
may also spur participants to save more—a key concern of plan
sponsors and the US Department of Labor (DOL).
The crucial issue here is the false sense of security that a lumpsum number might convey. Over a third of our respondents
said you could withdraw 10% or more. According to our
calculations, even with reasonably optimistic investment
returns, a 65-year-old male beginning with $250,000 (far more
than the average DC account balance for today’s retirees) and
withdrawing $25,000 per year would likely exhaust his savings
Understanding future income is an employee challenge
“Retiring at age 65 with $500,000, what percentage of that could you spend each year without running out of money for the rest of your life?”
36%
32%
27%
24%
19%
8%
17%
14%
Active Accidental
Investors Investors
14%
8%
1%–3%
4%–6%
7%–9%
10+%*
Don’t Know
Too many employees have a poor concept of turning
their nest egg into a steady income stream in retirement.
*Includes six ranges
Source: AllianceBernstein Research, 2012
7
Plan Sponsors:
Putting Problems into Perspective
Plan sponsors want to improve their plans in many different ways. But it’s good to look beyond problems and focus
first on the purpose and goals of your plan. Doing so may help clarify which issues are essential and how to fix them.
The Don’ts and Won’ts
Embracing Target-Date Funds
In our plan sponsor survey, we first asked our respondents
what their top concerns were. Most of these had to do with
what their plan participants don’t or won’t do. The top three
plan sponsor concerns were that participants don’t know how
much to save for retirement (61%), don’t understand their
investment options (60%) and won’t accumulate enough
money in the plan to retire (59%).
Some of those communications and investor limitations can
be alleviated when participants use target-date funds. As
a default, coupled with automatic enrollment and deferral
escalation, target-date funds provide a disciplined approach to
saving and investing. And many plan sponsors understand the
benefits of target-date funds: half our respondents said they
offer target-date funds—up from 40% in 2009.
It’s only when we get to the fourth-place answer that the focus
shifts from participants: 46% of plan sponsors felt that plan
and investment-management fees are too high—a sharp drop
down in importance from the top three answers. We found this
lower concern over fees surprising, given the DOL’s focus on
fee-disclosure regulations around the time of this survey.
But adoption of target-date funds varies widely by plan size,
with large plans using them most and small plans using them
least. We believe there are a number of possible reasons for
the low adoption rate among small plans. Small plan sponsors
may not have a trusted financial advisor or consultant who
would explain target-date benefits and help orchestrate the
implementation with their recordkeeper. Small plan sponsors
Plan sponsors are even more pessimistic about savings adequacy:
25% of participants felt confident or very confident that they’d
have a comfortable retirement; but 70% of plan sponsors
disagreed, feeling that participants wouldn’t have enough. We
believe that plan sponsors have a more accurate viewpoint, since
they see what everyone’s doing, not just one person.
Larger plans have embraced target-date funds
“Does your plan offer target-date funds?”
63% Large
Recognizing Limits of Communications
It would be a simple solution if more communications and
more education would fix the participants’ problems, but plan
sponsors recognize the limitations of communications. More
than half our surveyed plan sponsors felt communications were
only somewhat effective or not effective in helping participants:
„„ Create
appropriate monthly income or withdrawal rates
„„ Understand
investment options
„„ Increase
8
27% Small
22%
No, but plan to add
savings and deferral rates
Inside the Minds of Plan Participants and Sponsors
20%
13%
sensible asset allocations
„„ Understand
53% Mid
Yes
16%
No, do not plan to add
28%
60%
Source: AllianceBernstein Research, 2011
“Social Security will not be sufficient
to support someone in retirement.
I wish my employees understood this!”
are typically owners/CEOs who wear many hats, have little
time to research DC plan options and may rely on suggested
or predetermined menus provided to them.
What’s Your Plan’s Goal?
Some plan sponsors may not feel target-date funds
are appropriate for their plan. But to determine what is
appropriate, it’s good to first define the purpose or goal
for your DC plan. Is it to serve as the primary retirement
vehicle for your participants, or do you view it more as a
supplemental savings vehicle? To accumulate savings up to
retirement, or serve participants’ needs through retirement?
Your answers may depend on several factors beyond plan
size and costs: demographics, workforce mobility and
turnover, and availability of a pension or not. In our plan
sponsor survey, 65% of respondents said their DC plan
served as the primary retirement vehicle, and 33% called
it supplemental (2% selected “other purpose” as their
answer). It’s worth noting that significantly more small plans
(42%) said the purpose was supplemental.
Strong Interest in Secure Lifetime Income
If a plan’s goal is to serve as the primary retirement vehicle
and the target-date fund is meant to ensure savings that last
through retirement, how can that lasting income be secured?
The vast majority of participants want secure income, but
very few select annuities even when they are available in their
plan. We think a better alternative is to have a secure income
solution within the target-date default.
DC plan goals vary by plan size
“What’s the most important goal of your plan’s target-date
funds for participants?”
43% Mid
32% Small
30%
Ensure a minimum
acceptable level of
savings at the target
retirement date
Plan Goal and Target-Date Goal Often Align
It’s also worth noting that far more large- and midsize-plan
sponsors said the goal for their plans’ target-date funds was
to ensure savings that last through a participant’s retirement
years. Small-plan sponsors with target-date funds leaned
more toward these funds ensuring a minimum acceptable
level of savings at the target retirement date. We believe
that these results indicate a possible divergence in plan goals
and needs that roughly correlates to plan size and that DC
plans should adopt solutions (e.g., enhanced plan design and
targeted education on retirement income planning) that suit
these different needs.
54% Large
Ensure savings
last through
retirement years
36%
41%
16%
No stated goal
22%
27%
Source: AllianceBernstein Research, 2011
9
We specifically asked plan sponsors with $10 million or
more in assets about a target-date fund with a secure
lifetime income stream that allowed participants to keep
control and access to their account and that provided
downside protection and upside potential. Nearly threefourths of our plan sponsors (72%) found this appealing or
extremely appealing. Our survey also discovered that 16%
of all plan sponsors intend to add a guaranteed income
target-date fund in the next two years. We find this interest
extraordinary because guaranteed income target-date funds
are still very new to the DC industry.
Guaranteed income is on the near-term agenda
“What changes are you considering to your plan over the
next two years?”
Increasing the number
of investment options
39%
30%
Adding automatic enrollment
Changing fund managers
18%
Adding automatic escalation
of salary deferral rates
18%
Adding a guaranteed
income target date fund
16%
% of Respondents Showing Top Responses
Source: AllianceBernstein Research, 2011
Why Your Default Investment Matters
Qualified default investment alternatives (QDIAs) are
capturing most of the assets of younger savers today.
And within 10 years, QDIAs will likely account for the vast
majority of DC plan assets.*
Default Necessities and Repercussions
When participants don’t choose an investment option for
their plan assets, most DC plans automatically invest those
assets in a default investment option. Before the Pension
Protection Act of 2006 (PPA) and subsequent regulations
in 2007, plan sponsors didn’t have safe-harbor protection
from fiduciary liability for any default investment option. So
they typically employed extreme caution and used low-risk/
low-return options that were unlikely to lose money.
The PPA has changed that by extending fiduciary safeharbor protection to QDIAs that “include a mix of asset
classes consistent with capital preservation or long-term
capital appreciation or a blend of both.” The DOL clarified
this in 2007, giving the safe-harbor nod to three types of
diversified options: a target-date retirement fund product
or model portfolio; a target-risk fund or model portfolio
(such as a balanced fund); or an investment-management
service that allocates a participant’s assets among the
plan’s alternatives based on the participant’s age, target
retirement date or life expectancy. The DOL also lets plans
use stable-value or money-market funds as a temporary
QDIA, but only for the first 120 days after an employee
begins contributing.
Default safe-harbor protection applies to many situations
when a participant doesn’t provide investment direction,
including: automatic enrollment; when plans eliminate
an investment option or if there’s a change in service
provider; or if a participant rolls over assets from another
plan without indicating an investment choice for those
assets. But the QDIA safe harbor and other governmentsanctioned encouragements can help only if plan sponsors
are aware of them.
The Benefits of QDIAs
QDIAs not only provide safe-harbor protection for plan
sponsors, but these investment vehicles also often provide
better asset allocation for participants than they might
construct on their own. As more plans continue to adopt
automatic enrollment, the selection of a default option
will increase in importance.
*Source: Data from Cerulli Associates and Aon Hewitt Associates, modeled by AllianceBernstein. For more information, see “A New Paradigm” and
other AllianceBernstein Defined Contribution research publications at www.abdc.com.
10
Inside the Minds of Plan Participants and Sponsors
Default Disconnects
Many DC plans have target-date funds, but they may not be using these funds to their fullest advantage for plan
participants. With the growing emphasis on helping participants save and invest wisely, it may be time to make
your plan’s default investment a target-date fund.
Plan Purpose and Role of Default
Two-thirds of plan sponsors who responded to our survey
view their DC plans as the primary retirement vehicle for
most participants. Clearly, they would also want to have the
highest participation rate possible among employees. But only
20% report that their DC plans have participation rates above
90%. The majority of their plans have rates below 75%—and
a full one-fourth of plans have participation rates below 50%.
In other words, many plans are falling short of their goal
because it’s unlikely that nonparticipants are saving adequately
(or at all) on their own. And roughly 80% of plan sponsors feel
it’s important or very important to increase plan participation
(77%), increase employees’ savings levels (79%) and help
employees generate a retirement income stream (83%).
Clearly, automatic enrollment and automatic escalation are
ways to increase the participation rate and the level of savings.
Along with these, the choice of default becomes significant.
What’s Your Default?
Half our survey respondents say their plans offer target-date
funds, but only half of them use their target-date funds as the
plan’s default. What did those plan sponsors use instead of a
target-date fund as their default? Only 13% used a balanced
fund—another acceptable QDIA. An alarming 42% are still
using a stable-value/money-market fund, despite its timelimited, temporary status as a QDIA and its equally limited
ability to generate any growth potential. And 34% said they
have no default option at this time.
While it’s likely that some of these plans don’t have a default
investment, it may also be possible that some plan sponsors
don’t recognize the distinction between a qualified default
and any default investment. But the demands on fiduciaries
are increasing with every new regulation, so it may be a good
time for plan sponsors to revisit whether they have a default
option or not—and whether that default option provides
safe-harbor protection.
Plan size may also have a big impact on QDIA-related issues.
Larger plans tend to be more aware of the regulatory
landscape and the much more favorable safe-harbor
provisions for QDIAs. And larger plans are more likely to
use target-date funds as their default. For smaller plans
that currently aren’t considering target-date funds, we’ll
present an alternative solution that may help provide better
outcomes for participants (see “Enhanced Risk-Based
Funds,” page 16).
What is the default if it’s not target-date?
Stable-value/
money-market fund
42%
No default investment
option at this time
Balanced fund
34%
13%
Equity fund
5%
Risk-based asset-allocation
fund (lifestyle fund,
model portfolio, etc.)
4%
Bond fund
2%
% of respondents
offering
Source: AllianceBernstein
research,
2011target date
funds but not using them as a QDIA
11
Measuring Success
To improve your plan—for the benefit of employees as well as your organization—you need to define your criteria
for success and how to measure them. Because what gets measured, gets improved.
Hierarchy of Success Factors
We asked plan sponsors in our survey to select their top three
measures of success for their organizations’ DC plans. While
all the factors have merit, only one got a majority response:
helping employees feel confident about their prospects
for a comfortable retirement. This aligns closely with plan
sponsors’ concerns that participants don’t know how much
to save, don’t understand their investment options and won’t
accumulate enough money in the plan to retire.
Also of note, midsize plans were more concerned with
improving participation (37%) than either the small- or
$500 million+ large-size plans (both at 28%). But we also
discovered that small plans reported the highest incidence of
low participation (30% or less) rates, possibly indicating that
a meaningful subset of small plans accept low participation as
satisfactory. And large plans had the highest showing of high
participation (86% or higher) rates, which could explain the
lower emphasis on improving participation for this group.
Interesting Anomalies by Plan Size
We found a few interesting divergences between smaller
and larger plans. For example, sponsors of small plans gave
a meaningfully higher score (60%) for wanting participants
to feel confident about retirement than sponsors of midsize
(48%) and large plans (51%). With the fewest employees,
these plan sponsors (probably the CEO/owner) may have the
greatest interaction with all their employees and consequently
the greatest personal empathy with their retirement futures.
Sponsors of midsize and large plans placed a higher emphasis
on improving age or risk-based allocations—at 24% and 29%,
respectively—than sponsors of small plans at 16%. However,
the sponsors of large plans were least interested in improving
salary deferral amounts—only 16% compared with the 21%
response from both small and midsize plans. That lower
interest in salary deferral for large-plan sponsors may reflect
that more of these plans already use automatic escalation.
Critical measures of success for all plans
Having employees feel
confident about prospects
for a comfortable retirement
Improving employee understanding
of investment options
40%
Reducing plan administrative costs
39%
34%
Improving participation
Improving employee understanding
of how balances translate
into retirement income
Reducing plan investment costs
Improving salary deferral amount
Source: AllianceBernstein Research, 2011
Inside the Minds of Plan Participants and Sponsors
43%
Offering investment options
that consistently
outperform benchmarks
Improving participant portfolio
allocations according to age
and/or risk preferences
12
51%
28%
23%
22%
20%
“We need employees to
understand that no one but them
can prepare for their retirement.”
Altering the Perspective on Success
It’s noble to want employees to feel confident about their
prospects for a comfortable retirement and to help them
improve their understanding of investment options. But
a large majority of participants are unlikely to learn more
about investing and become more confident about building
their retirement security. And any data on confidence are
influenced by numerous factors, including the state of
employment, economic and market conditions, and global
political unrest.
So it’s a questionable proposition to gauge a plan’s success
based on either of the top two measures cited by plan
sponsors: improving participants’ retirement confidence and
improving their understanding of investment options. And to a
large extent, the third measure—offering investment options
that consistently outperform benchmarks—is not controllable.
The first truly controllable success measure is the fourth
one on the list: reducing administrative costs. To us, that
suggests the need for a new approach to measuring the
success of a DC plan: shift the emphasis to achieving what
the plan can control.
Achieve what you can control
Ability to Directly Control
High
Low
None
Having employees feel
confident about prospects
for a comfortable retirement
ü
Improving employee
understanding of their
investment options
ü
Offering investment options
that consistently outperform
benchmarks
ü
Reducing plan
administrative costs
ü
Improving participation
ü
Improving employee
understanding of how balances
translate into retirement income
ü
Improving participants’ portfolio
allocations according to age
and/or risk preferences
ü
Reducing plan investment costs
ü
Improving salary deferral amount
ü
13
Let Objectives Determine Primary Measures…
…and the Strategies Emerge Naturally
Your objectives will then dictate which measures should get
a high emphasis on your list and which should be low. For
example, let’s say your organization still has a pension plan
and the vision for your DC plan is a self-directed, supplemental
source of retirement assets. Typically, you would be taking a
hands-off approach—creating a solid, basic DC plan framework
that workers could use as they see fit. You might want to first
focus on reducing plan administrative costs with a moderate
emphasis on maintaining great-performing investments on
your plan menu.
If the vision for your plan is to be the primary retirement
vehicle with a strong emphasis on helping your participants all
the way through their retirement years, you may significantly
emphasize automation and increasing participation and
contributions. You may also focus on giving participants
a personal forecast of how their nest egg translates into
monthly retirement income—and with that, a better
understanding of withdrawal rates. But perhaps at the top of
your list in this case, you might want to provide participants
with an easy avenue to secure lifetime income.
Now let’s assume you see your plan as supplemental, but
you also want it to achieve some level of replacement income
for participants during their retirement. Along with top
investment performance, you may want to raise participation
rates and deferral rates and also reduce administrative costs.
In any case, the success measures that will make most sense
for your plan generally will become more clear after you
establish an overarching vision and philosophy.
Make measures fit the goal—not the other way around
Role of Plan
Supplemental
Primary
�
Use automation extensively
Guided
�
Focus on investment performance and costs
�
Conduct re-election
�Narrower investment menu
�
Robust service/communications
�Moderate service/communications
�
Focus on investment performance and costs
�Conduct re-elections
�
Narrower investment menu
�
Emphasize lifetime income
Vision
of
Sponsor
SelfDirected
�
Lower plan administrative costs
�
Focus on investment performance and costs
�
Broader investment menu
�
Broader investment menu
�
Offer sufficient service features
�
Emphasize lifetime income
Source: AllianceBernstein
14
Inside the Minds of Plan Participants and Sponsors
The Case for Customization
Many DC plans may already have target-date funds on their menu, but there are several ways that plan sponsors can
improve the structure and increase the use of these funds—while making progress on some key success measures at
the same time.
Making the Most of Your Target-Date Option
With default investments poised to garner the majority of plan
assets in the coming years, plan sponsors should consider how
best to improve the structure and use of their default. Targetdate funds are currently the most widely used of defaults,
especially among large plans. So it surprised us that only 22%
of large plans have customized target-date funds—essentially
the same as midsize plans at 21%.
We asked why, and over a third of large-plan sponsors said
they weren’t aware of the benefits of changing the structure.
But large plans generally have more bargaining power with
the recordkeeper and the investment managers. And if the
target-date option is the plan’s QDIA, customization can
bring advantages such as an investment program specifically
tailored to the plan’s fiduciary objectives, easier adaptability
over time, greater cost control and fee transparency, enhanced
performance terms and enhanced fiduciary strength.
Re-Election to Improve Age-Based Allocations
If plan sponsors choose to customize their target-date fund
offering, they should also consider implementing it with a
re-election process. The chart to the right shows the initial
distribution of equity holdings among participants of a plan
that AllianceBernstein later helped to design a customized
target-date fund platform. Participant asset allocations showed
no rhyme or reason, and no understanding of appropriate
exposures for different ages. And even though the plan had
risk-based funds, there was still far too much risk-taking among
older participants. The custom target-date fund glide path was
constructed to improve age-appropriate allocations.
But creating a customized target-date fund offering won’t
have any substantive effect if it’s simply added to the plan’s
menu: participant inertia is far too strong, and we’ve typically
seen less than a 5% incremental addition to the target-date
funds (excluding any mapped assets). We feel it’s preferable
to implement a re-election process, alerting participants in
advance and allowing them to opt out if they choose, but
otherwise to automatically move their assets into the new
target-date funds—thereby using participant inertia to their
advantage.
With such a re-election process, we’ve typically seen
approximately half the plan’s assets moving—and remaining—
in the target-date funds.
Use re-election process to improve age-based allocations
(%)
100
80
60
40
20
0
Age 25
30
35
Client’s Custom
Target-Date Glide Path
40
45
50
Equities by
Participant
55
60
65
Equities by
Participant in
Risk-Based Funds
Source: AllianceBernstein
15
Better by Default
Getting plan participants to save and invest better and have more confidence about their retirement will begin only
if DC plans are simple and automatic. That means a plan’s default investment plays a crucial role. But what that
default is may be quite different, depending on your plan’s goals and size.
Choosing the Best QDIA for Your Plan
For almost a decade, our research has continued to reaffirm
the value and advantages of target-date funds—in their
increasingly flexible and adaptable design as well as their
built-in investment advantages for so many workers. But
target-date funds are not the only QDIA options, and some
plans may have objectives and obstacles that call for a
different default solution.
For example, the majority of small-plan sponsors (60%) don’t
have target-date funds and don’t plan to add them. Their
reasons could stem from a smaller employee population
and DC plan asset base. But our survey also showed that
half of small-plan sponsors (51%) say they have no default
investment in the plan—far higher than the total survey
population’s 34%. Sponsors of small plans are also far less
confident they understand plan fees or the value of those fees
than the total survey population. They also have less interest
in receiving information about legislative updates or fiduciary
responsibility reviews. That’s worrisome, because 84% of
sponsors of small plans are the sole or primary decision maker
for their plans, yet only 40% consider themselves a plan
fiduciary. Clearly many small-plan sponsors do not understand
this fiduciary role and could benefit from working with a
financial advisor.
These issues can exist for all plan sizes, but they tend to be
more pronounced for smaller plans—those with assets under
$50 million. These plan sponsors may not want target-date
funds or feel they need a QDIA, but they may want something
that can offset another concern: market risk. It has taken
16
Inside the Minds of Plan Participants and Sponsors
center stage since the advent of the credit crisis, and it’s
unlikely that extreme market volatility will dissipate anytime
soon. So a significant number of plan sponsors want to find
a solution that can absorb their employees’ fear of risk and
distrust of the markets.
Enhanced Risk-Based Funds
Risk-based funds are one of three QDIAs, but they are limited
in the type of tactical maneuvering that might be warranted
in times of extreme market volatility. So we specifically
asked sponsors of plans with assets under $50 million their
opinion about a hypothetical, enhanced risk-based assetallocation (or lifestyle) fund. We told them that the fund can
help mitigate the damage of extreme market volatility to
participants’ balances by having a professional investment
manager make adjustments to the fund’s asset allocation
when certain market performance criteria are triggered. This
type of investment would offer participants: the ability to
select an investment option based on their personal tolerance
for risk (conservative, moderate, aggressive) versus their age;
automatic asset-allocation adjustments by a professional
investment manager in response to market volatility to help
mitigate risk/loss; and competitive fund-management fees.
The response was strong: 53% of sponsors from these plans
found this enhanced risk-based strategy to be appealing
or extremely appealing—only 8% of reponses were not
favorable. And 72% of these plan sponsors said they would
consider adding such a fund option to their plans within the
next three years.
“We need to secure all investments as
much as possible and assure employees
that they’ll have a stable retirement.”
Taking Target-Date Funds to the Next Level
Enhanced risk-based funds are just one of many evolutions
in DC plans today. AllianceBernstein offers a variety of
volatility-management approaches, which seek to dynamically
adjust exposures to mute the impact of risky markets and
improve diversification across the portfolio. These volatilitymanagement tools can easily fit into target-date funds.
That’s because target-date funds, in essence, take a strategic
viewpoint on the appropriate level of risk at any given point
along the lifecycle. Volatility management is a way to enhance
investors’ experience by modifying the impact on investments
when risk is elevated.
Adapting Your Plan for the 21st Century
Lifetime income is the one big benefit of Social Security
and pension plans that hasn’t been part of DC plans to
date. That’s also the one big benefit that the vast majority
of participants want. The retirement industry has been
experimenting with ways to fold lifetime income into
the DC structure, and AllianceBernstein has developed
a DC-embedded lifetime income solution using multiple
insurance companies. This multi-insurer strategy helps
promote price competition among the insurers, allows
for insurers to be added or removed, and increases the
guarantee capacity for the DC plan—all fiduciary-friendly
advantages for plan sponsors.
A call for risk-based asset-allocation funds
11%
Extremely appealing
42%
Appealing
% Who Say Risk-Based Asset
Allocation Is Appealing/
Extremely Appealing
21%
Within 3 years
51%
Within 2 years
% Who Intend to Add
Risk-Based AssetAllocation Funds
Source: AllianceBernstein Research, 2011
To make a lifetime income solution work for DC plans,
it should be used as the plan’s QDIA in conjunction with
automatic enrollment. And we believe that a customized,
secure income target-date solution backed by multiple
insurance companies can provide DC plans with a sensible,
durable approach to retirement funding and spending.
17
Conclusions from Our Research
The road to retirement has had several twists and turns, but it keeps moving steadily forward toward better
solutions for working Americans. Below, we present some of our key research conclusions.
Target-Date Funds Get High Marks
Achieving Success: Ways to Evolve Your Plan
„„ More
„„ Align
participants use target-date funds with each
passing year, and the level of satisfaction has gone from
high to higher.
„„ Strong
satisfaction appears even more striking when placed
in the context of several years of extremely volatile and
difficult markets.
„„ The
asset allocation benefits of these funds holds critical
importance for DC plans, because so many participants
don’t like investing and won’t change their behavior—even
with excellent communications and education.
Lifetime Income Is What Participants Really Want
„„ Over
two-thirds of participants want a steady stream of
retirement income from their plan—and many participants
mistakenly believe they already have it.
„„ There’s
also high appeal among plan sponsors for a targetdate fund with a secure lifetime income stream.
„„ High
appeal and demand for a lifetime income
solution strongly indicates where DC plans should go
in the near future.
18
Inside the Minds of Plan Participants and Sponsors
your measures and strategies with your plan’s
objectives.
„„ Automate
and intervene to the greatest degree for
outcome-oriented results.
„„ Ensure
that your plan has a valid QDIA—most likely a
target-date fund.
„„ Investigate
custom target-date fund benefits if currently in
an off-the-shelf structure.
„„ Use
re-elections to improve age-based allocations.
„„ Enhance
your risk-based or age-based default investment by
adding some form of volatility management.
“The viability of our DC
plan will greatly depend on
legislative/regulatory changes.”
Plan Sponsors Speak Out: Potential Future Federal Tax-Law Changes
To help balance the federal budget, the US government
is considering several proposals that could change the
pre-tax treatment of contributions and tax-deferred
investment growth in DC plans. Two main proposals* are:
„„ Modify
private-sector retirement plans by capping
annual tax-deferred contributions to the lower of
$20,000 or 20% of income (“20/20 cap”).
„„ Modify
existing tax treatment of both worker and
employer 401(k) contributions and introduce a flat-rate
refundable credit that serves as a federal matching
contribution into a retirement savings account.
In our survey, we presented plan sponsors with two
hypothetical scenarios based on the second tax-law
proposal above.
Our first hypothetical scenario said: “Suppose US legislation
was enacted such that employees were no longer allowed
to deduct retirement savings plan contributions from their
federal taxable income. In addition, suppose that the
employee had to pay federal income tax on anything an
employer contributed to the employee’s retirement savings
account in the year it was contributed. In exchange for
this modification of the current tax incentives, assume that
the US government would match 30% of whatever was
contributed to a retirement savings plan.”
Nearly one-fourth (23%) of our respondents felt they
would decrease their average employer match, and
a further 12% would drop their plans entirely. About
one-third (31%) said they didn’t know what they might
do, and 17% said they would likely enact no change. But
the majority did expect a decrease in participation (58%)
and a decrease in contribution rates (56%).
Our second scenario said: “Again, suppose the same
scenario as described above. But this time, assume that
the US government would match only 18% of whatever
was contributed to a retirement savings plan, in exchange
for this modification of the current tax incentives.”
In this case, 27% of respondents said they would decrease
their employer contributions, and 15% would drop
their plan altogether. Two-thirds of our respondents felt
participation rates would fall in response to this legislation
and that contribution rates would decrease by some
amount.
Although the federal government has provided—and even
increased—tax advantages for DC plans since their onset,
plan sponsors should be aware that there is no guarantee
that those advantages will remain untouched in the
coming budget and deficit battles.
*Employee Benefit Research Institute (EBRI), EBRI Notes, vol. 33 (March 2012).
19
Key Terms
“Target date” in a fund’s name refers to the approximate year when a plan participant expects to retire and begin withdrawing from his or her
account. Target-date funds gradually adjust their asset allocation, lowering risk as a participant nears retirement. Investments in target-date
funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—
including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
Our Survey Description of a Secure Income Target-Date Fund: Income stream payments would be based on a percentage of your highest
account balance in the years leading up to your retirement. This enhanced target-date fund would offer you:
„„An
income stream that will last as long as you live
„„Payouts
based on a percentage of your highest account balance in the years leading up to your retirement
„„Income
protection in down markets—negative market performance won’t reduce the size of your payments
„„The
potential to increase the size of your payments with gains in your investments
„„The
flexibility to take part or all your money out of your account at any time without incurring withdrawal fees/penalties
„„Offered
at a competitive market investment-management price/fee
Our Survey Description of an Enhanced Risk-Based Asset-Allocation Fund: Helps mitigate the damage of extreme market volatility to
participants’ balances by having a professional investment manager make adjustments to the fund’s asset allocation when certain market
performance criteria are triggered. This type of investment would offer participants:
„„The
ability to select an investment option based on their personal tolerance for risk—conservative, moderate, aggressive vs. age (like a
traditional lifestyle fund)
„„Automatic
asset-allocation adjustments by a professional investment manager in response to market volatility to help mitigate risk/loss
„„Competitive
20
fund management fees
Inside the Minds of Plan Participants and Sponsors
Note to All Readers: The information contained herein reflects, as of the date hereof, the views of AllianceBernstein L.P. (or its
applicable affiliate providing this publication) (“AllianceBernstein”) and sources believed by AllianceBernstein to be reliable. No
representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee
that any projection, forecast or opinion in these materials will be realized. Past performance is neither indicative of, nor a
guarantee of, future results. The views expressed herein may change at any time subsequent to the date of issue hereof. These
materials are provided for informational purposes only, and under no circumstances may any information contained herein be
construed as investment advice. AllianceBernstein does not provide tax, legal or accounting advice. The information contained
herein does not take into account your particular investment objectives, financial situation or needs, and you should, in considering
this material, discuss your individual circumstances with professionals in those areas before making any decisions. Any information
contained herein may not be construed as an offer or solicitation for the purchase or sale of, any financial instrument, product or
service sponsored or provided by AllianceBernstein L.P. or any affiliate or agent thereof. This is not intended to be legal advice (and
should not be relied upon as such) but just a discussion of issues. Plan sponsors should consult with their legal advisors for advice
regarding their particular circumstances.
Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio
carefully before investing. For copies of our prospectus or summary prospectus, which contain this
and other information, visit us online at www.alliancebernstein.com or contact your AllianceBernstein
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AllianceBernstein Defined Contribution Investments is a unit of AllianceBernstein L.P., and AllianceBernstein Investments, Inc. is
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AllianceBernstein® and the AB logo are registered trademarks and service marks used by permission of the owner,
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