Access to alternatives may be on the rise; plan sponsors mixed on ESG

The retiring boomer generation has spurred the defined contribution (DC) industry to do more to help plan participants turn their savings into steady income. New research from PGIM DC Solutions, the retirement solutions provider of PGIM, finds that 7 in 10 DC plan sponsors report taking steps to solve the retirement income challenge, but there is more work to be done.

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Mikaylee O’Connor, Principal, Senior Defined Contribution Strategist, PGIM DC Solutions (Photo: Business Wire)

“As DC plans continue to evolve from savings vehicles to true retirement plans, retirement income will become a more pertinent focus area for plan sponsors, requiring more research and action,” said Mikaylee O’Connor, senior defined contribution strategist, PGIM DC Solutions. “Plan sponsors don’t need to face this journey alone — they should continue to leverage experts and lean on strategic partners for guidance.”

Additional findings include:

• Plan sponsors are in various stages of their retirement income journey: A plurality (34%) is studying retirement income approaches, and 15% are in the process of evaluating or implementing a solution. However, 27% of plan sponsors admit retirement income is not currently a topic of interest or need.
• Stable value funds are the most common solution: When it comes to products and solutions designed to support retirement income, plan sponsors cite stable value (70%) and the income fund in a target-date series (46%) as the most offered vehicles.
• Annuity consideration is on the rise: Products most likely to be considered for future inclusion in 401(k) plans include annuities, long-duration fixed income funds, and managed accounts that support decumulation.

PGIM’s research, conducted in partnership with Coalition Greenwich, is based on a survey of 155 DC plan sponsors and sought to better understand the evolving DC landscape, including 401(k) menu design, retirement income solutions, and the use of environmental, social and governance (ESG) investments.

Are alternative investments on the rise in 401(k)s?

More DC plan sponsors report offering alternative investment options on their 401(k) menu, with 21% indicating they offer at least one option in 2022 compared to only 9% in 2020.* Alternative investment options were defined in the survey as liquid alternatives, real estate private equity, real estate private debt, private credit or hedge funds.

Despite their popularity in institutional portfolios, alternatives to traditional stocks and bonds are still not commonplace in 401(k) plans or within target-date funds. Plan sponsors’ top reasons for not adding alternatives to the investment menu or target-date fund series include the need for participant education, operational challenges, cost, and litigation risk.

Retirement plans less interested in ESG

On the hot-button issue of ESG investing, plan sponsor views are mixed, with only 1 in 4 (28%) plan sponsors reporting at least one ESG fund on their 401(k) menu, and 12% offering an ESG target-date fund series. For 36% of respondents, ESG is not a topic of interest.

O’Connor added, “ESG continues to be an evolving area with differing views, changing definitions, a variety of approaches, and regulatory impacts. Our research indicates most plan sponsors are in one of three camps: those who have taken action, those who are still evaluating, and those who are not considering ESG for their 401(k) plan at all.”

More detailed findings on the survey can be found here: The Evolving DC Landscape

ABOUT THE SURVEY

The research was conducted by Coalition Greenwich from May 23 to Aug. 26, 2022, using an online, quantitative approach with 155 DC plan sponsors who have at least one 401(k) plan and at least $100 million in 401(k) assets. Plan breakdown by AUM: 36 plans with $100-$249M AUM; 37 plans with $250-$499M AUM; 31 plans with $500-$999M AUM; 32 plans with $1-$4.9B AUM; 19 plans with over $5B AUM.

*PGIM conducted a similar study with Coalition Greenwich, fielded Mar. 5 through Jul. 17, 2020, using an online, quantitative approach with 138 DC plan sponsors who have at least one 401(k) plan and at least $100 million in 401(k) assets. Plan breakdown by AUM: 35 plans with $100-$249M AUM; 41 plans with $250-$499M AUM; 29 plans with $500-$999M AUM; 26 plans with $1-$4.9B AUM; 7 plans with over $5B AUM.

ABOUT PGIM DC SOLUTIONS

PGIM DC Solutions is the retirement solutions provider of PGIM, committed to helping American workers achieve their individual retirement goals through innovative, personalized investment solutions backed by differentiated research and investment capabilities. As of Dec. 31, 2022, PGIM had $160 billion in DC assets under management.

ABOUT PGIM

PGIM is the global asset management business of Prudential Financial, Inc. (NYSE: PRU), a leading global investment manager with more than $1.2 trillion in assets under management as of Dec. 31, 2022. With offices in 18 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.

Prudential Financial, Inc. (PFI) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. For more information please visit news.prudential.com.

PGIM DC Solutions is an SEC-registered investment adviser, a Delaware limited liability company and is a direct wholly owned subsidiary of PGIM Quantitative Solutions LLC, and an indirect wholly-owned subsidiary of PGIM, Inc., the principal asset management business of Prudential Financial, Inc. of the United States of America. Registration with the SEC does not imply a certain level of skill or training.

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