The power of moving first: Avoiding groupthink in defined contribution plans 

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By overcoming challenges that prevent plan sponsors from being early adopters, organizations could embrace more innovations for their DC plans.

Historically, defined contribution pension plans (DC plans) have been hesitant to be early adopters of investment or plan design innovations. However, there are significant benefits to being a first mover in this space. In a recent poll conducted during Mercer's Global Investment Forum in Nashville, we found that a majority of DC plan sponsors were not likely to be early adopters: 62% said they were “not likely at all” while 30% were “somewhat likely” and only 8% were “very likely”.

Five potential benefits of being an early adopter

  1. Meeting participants' unique needs
    Being an early adopter allows plan sponsors to introduce features or products that cater to the unique needs of plan participants. By analyzing plan demographics, sponsors can identify specific requirements and tailor their offerings accordingly.
  2. Improving plan accessibility
    Early adopters can lower barriers to entry, making the plan more accessible to participants. For example, emergency linked plans can provide participants with immediate access to funds during unforeseen circumstances, enhancing their financial security.
  3. Access to exclusive benefits
    Being a first mover enables plan sponsors to provide employees with benefits they may not be able to access individually, such as institutionally priced annuities and private investments. This can potentially boost the overall attractiveness of the plan.
  4. Standout benefits offering
    In highly competitive industries like technology and financial services, being an early adopter differentiates the plan by offering standout benefits that can help attract and retain top talent.
  5. Cost efficiencies
    Early adopters often enjoy cost efficiencies, such as fee reductions, implementation fee waivers, and access to founder share classes. By engaging with record keepers at an early stage, employers have more opportunities to provide feedback and directly shape the development of the system.

What stops employers from being early adopters

Despite the benefit, several factors often deter plan sponsors from taking the leap and becoming early adopters. These include:
  • Waiting for demand
    Some employers wait for record keepers to approach them with new offerings, yet record keepers are waiting for increased demand. This can create a cycle of inaction.
  • Regulatory guidance
    Some organizations await safe harbor or other supportive guidance from regulatory bodies like the Department of Labor or Internal Revenue Service before embracing innovations. These employers are wary of jumping the gun ahead of regulation.
  • Fear of litigation
    Although litigation is not a good roadmap for strong decision-making, it can still be a common barrier to early adoption. Plan sponsors fear being singled out for doing something different, even if they have followed a defensible process. Litigation cases are increasing, yet dismissals remain relatively flat – meaning most cases end with settlements (which means even more litigation).1 This cycle ultimately stifles innovation and hampers employee benefits.

How organizations can become early adopters

Establish a robust decision-making process for your pension plan

Document the decision-making and due diligence process and involve external experts and legal guidance where needed. Being a first mover doesn’t always require plan sponsors to make the “right” decision, as long as the correct process has been followed.

Focus on the pension plan participants

Recognize that each defined contribution pension plan is unique. Decisions should be based on the demographics and unique needs of plan participants, alongside overarching philosophies from your Retirement Plan Committee. Benchmarking against the wider market is useful but should not be the sole basis for decision-making — and nor should litigation.

Delegate the pension plan’s fiduciary role

Consider delegating the fiduciary role to trusted experts who can make decisions on behalf of the plan sponsor. This can help navigate complex regulatory requirements and further mitigate risks.  

Being a first mover in DC plans requires empowerment, due diligence, and a mindful approach to risks. By embracing innovation and avoiding groupthink, plan sponsors can meet the unique needs of plan participants while staying ahead of the curve. It is essential to document the decision-making process, involve external experts, and put the demographics and preferences of plan participants first. Despite the potential barriers, being an early adopter can improve plan outcomes and give an employer a competitive edge.

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  1. Information sourced through Ignites, Law360, NAPA, Pensions & Investments, and PlanSponsor as of April 18, 2024.