The power of moving first: Avoiding groupthink in defined contribution plans
By overcoming challenges that prevent plan sponsors from being early adopters, organisations could embrace more innovations for their DC plans.
Five potential benefits of being an early adopter
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Meeting participants' unique needsBeing an early adopter allows plan sponsors to introduce features or products that cater to the unique needs of plan participants. By analysing plan demographics, sponsors can identify specific requirements and tailor their offerings accordingly.
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Improving plan accessibilityEarly 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.
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Access to exclusive benefitsBeing 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.
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Standout benefits offeringIn 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.
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Cost efficienciesEarly 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
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Waiting for demandSome 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.
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Regulatory guidanceSome organisations await safe harbour or other supportive guidance from regulatory bodies like the Department of Labour or Internal Revenue Service before embracing innovations. These employers are wary of jumping the gun ahead of regulation.
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Fear of litigationAlthough 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 organisations can become early adopters
Establish a robust decision-making process for your pension plan
Focus on the pension plan participants
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.
Defined Contribution Leader, Mercer US