Defined Contribution Quarterly 4Q 2024

In The News

Defined Contribution Industry

Key Developments

The Employee Retirement Income Security Act (ERISA) turned 50. ERISA revolutionized the retirement industry by establishing laws and regulations intended to protect participants and beneficiaries of private employers’ benefit plans.
The IRS issued a private letter ruling allowing a company to offer employees the flexibility to choose into which benefit plan employer nonelective contributions should be deposited. The employees may allocate such contributions between several non-taxable benefit plans, such as an Employee HSA, an Educational Assistance Program, a Retiree HRA or a 401(k) plan. While this ruling only applies to the company that received it, the door may be open to more flexibility for recipients.
JPMorgan has announced the launch of a target-date fund series, the SmartRetirement Lifetime Income TDF, with an embedded guaranteed income annuity, provided by insurers.
T. Rowe Price launched a new dynamic TDF product, the Personalized Retirement Manager, that transitions participants into a managed account solution at a selected age and uses the same underlying funds as the TDF.
Milliman, Inc. introduced a student loan certification solution through Candidly. It is intended to help plan sponsors provide student loan matching contributions for qualified student loan payments.

SECURE 2.0 Corner

The IRS published final guidelines for eligibility and withdrawals for required minimum distributions (RMDs) of inherited retirement assets. These guidelines may help beneficiaries determine the timeframe in which RMDs must be taken.
The IRS issued FAQs to offer interim guidance on Student Loan Matching Payments for defined contribution plans, including details about eligibility, limitations of contributions, and how payments should be certified.

Regulatory, Legislative & Litigation

Regulatory

The DOL’s Retirement Security Rule is not in effect due to litigation challenges. District courts in both the Eastern and Northern Districts of Texas have stayed the rule nationally. The DOL has filed appeals to attempt to overturn the stay orders. Additionally, legislation has been introduced in the House to overturn the rule.

Legislative

A bill was introduced in the Senate that would allow Collective Investment Trusts (CITs), to be utilized in 403(b) plans. A similar bill has already been passed in the House.
A bill was introduced in both the House and the Senate with the intention of lowering the required minimum age for eligibility in employer-sponsored retirement plans from age 21 to 18.
A bill was passed in the House that requires fiduciaries to generally only consider pecuniary factors when making investment selections for retirement plans (which is targeted at environmental, social and governance (ESG) investing). This bill is now in the Senate.

Litigation

Litigation filed this period continues to focus on recordkeeping fees, investment management fees and investment performance. There were additional cases filed alleging improper use of forfeited contributions.

Settlements reported during the covered period ranged from $330,000 to $7.9 million. Three settlements included non-monetary terms, with two requiring plan fiduciaries to conduct a request for proposal for recordkeeping services within three or five years.

A number of dismissals took place at the district court level, including a grant of summary judgment and trial decision. Another court granted a motion to dismiss claims of misusing plan proceeds.

A circuit court affirmed that an arbitration clause was unenforceable against plaintiffs.

The Supreme Court has agreed to review an appellate court decision concerning what facts plaintiffs must allege to support a claim that a plan engaged in a prohibited transaction when engaging a service provider.

ERISA 50: Past

“The farther back you can look, the farther forward you are likely to see.”

- Winston Churchill

Commemorating 50 Years of ERISA
On Labor Day in 1974, President Gerald Ford enacted the Employee Retirement Income Security Act (ERISA), a landmark piece of legislation designed to safeguard the retirement and health benefits of American workers. In September 2024, the retirement and health benefits industry reflected on the origins of this pivotal law, marking 50 years of progress in securing the financial futures of millions.

Why Was ERISA Passed?
Pensions had existed for over a century before the passage of ERISA, but in the decade leading up to its enactment, concerns grew over the lack of rules and regulations that protected retirement and health benefits from corporate mismanagement. A pivotal moment came with the bankruptcy of the Studebaker Corporation, which left thousands of workers without their promised pensions. This incident, highlighted by NBC’s broadcast of "Pensions: The Broken Promise," brought widespread attention to the vulnerabilities of the unregulated pension system and spurred a national conversation.

Strengthening worker protections became a key priority for the Nixon administration. However, following President Nixon's resignation in 1974 due to the Watergate scandal, newly appointed President Gerald Ford sought to reassure the public that Congress could still effectively govern. ERISA, a bipartisan bill introduced years earlier by Senator Jacob Javits, was poised for passage and became one of the first major legislative acts under President Ford's administration.

Impact on 401(k) Growth
The primary goal of ERISA was to expand and restore trust in the private pension system, primarily through mechanisms like the creation of the Pension Benefit Guaranty Corporation (PBGC). Originally, however, ERISA had little to do with the growth of 401(k) plans. In fact, it initially placed restrictions on existing deferred profit-sharing plans, or cash or deferred arrangements (CODA), which had been in existence since as early as 1953 and served as a precursor to the modern 401(k). It was not until the Revenue Act of 1978 that this feature was reintroduced and formally codified in section 401(k) of the Internal Revenue Code.

Defined Contribution Asset Growth Under ERISA (1974-2024)

Source: Investment Company Institute and Goldman Sachs Asset Management. Data as of Q2 2024, latest available.

ERISA 50: Present

As the industry commemorates this landmark legislation, it is essential to acknowledge the shift from DB plans (what ERISA sought to restore) to DC plans, which became the predominant private employer-based retirement program. While ERISA wasn’t the sole catalyst for the transition from DB to DC plans, it played a part along with other changes such as the Revenue Act of 1978, the passage of new accounting rules related to DB plans in 1985, and the Pension Protection Act of 2006, to name a few. Below are key statistics that illustrate this progression in the private sector retirement landscape.

Private Sector DB and DC Coverage

$13 Trillion of ERISA-Covered Retirement Assets (DB and DC Assets)
141M participants covered

Shift from DB Plans to DC Plans

1989:
- 63% of employees covered by DB plans
- 36% of employees covered by DC plans
2024:
- 15% of private workers have access to DB plans
- 70% of private workers have access to DC plans (50% participation rate)

Growth of DC plans

From 207,478 in 1975 to 754,862 in 2022

Participants Covered by DC Plans

From 11,507,000 in 1975 to 121,311,000 in 2022

DC Plan Asset Growth¹

From $75B in 1975 to $8.1T in 2022

Median Retirement Savings

$25,360 in 1989 to $87,000 in 2022

Number of Active Participants in Workplace Retirement Plans (Single-Employer Plans)

1. DC plan asset growth and median retirement savings adjusted for inflation.

Source: Employee Benefits Security Administration, Congressional Research Service, US Department of Labor, Bureau of Labor Statistics, and Goldman Sachs Asset Management. As of October 2024. Chart source: Employee Benefits Security Administration Private Pension Plan Bulletin Historical Tables and Graphs (1975 – 2022). As of September 2024, latest available.

ERISA 50: Future Improvements Needed

The focus of future developments should be aimed at enhancements needed to ensure the retirement system works for all. Three key areas of focus are:

Mitigating the disparity of retirement savings
Closing the coverage gap that impacts millions of small businesses, non-employee businesses and gig and contract workers
Supporting the inclusion of retirement income solutions

Mitigating the Disparity of Retirement Savings

The top income groups have experienced the most significant growth in retirement savings over the past 30+ years. However, for lower-income individuals, saving for retirement presents greater challenges. These challenges include balancing competing financial priorities and retaining retirement savings during times of financial hardship. This disparity highlights the need for targeted solutions to support retirement security for workers across all income levels.

Median Retirement Savings Growth by Income Level

Source: Survey of Consumer Finances, Federal Reserve, and Goldman Sachs Asset Management. As of October 2024. Retirement savings chart data as of November 2022, latest available.

Closing the Coverage Gap That Impacts Millions of Small Businesses, Non-Employee Businesses and Gig and Contract Workers

Small businesses are the backbone of the U.S. economy, employing over 61 million workers, or 46% of the labor force, and contributing to two-thirds of job growth over the past 25 years². However, significant gaps remain in retirement plan coverage for these businesses and their workers. Key facts to consider:

Out of 6 million small business employers, only 53% of those with 100 or fewer employees offer retirement plans to their workers.
There are 26.5 million non-employee businesses, such as sole proprietorships, that often lack access to retirement plans.
Approximately 41 million workers hold gig or freelance roles, most of which do not offer retirement benefits.

These gaps underscore the need for targeted efforts to expand retirement plan access across small businesses and non-traditional work arrangements.

Small Business Counts by Employee Size

Source: US Census Bureau County Business Patterns as of 2022, latest available.

Supporting the Inclusion of Retirement Income Solutions

Today, the vast majority of 401(k) plans do not offer guaranteed income solutions. With fewer retirement savers covered by pensions, many individuals will be responsible for managing their 401(k) investments to generate consistent and sustainable income needing to last for an uncertain duration. Nobel Prize-winning economist William Sharpe once described this as the “nastiest, hardest problem in finance.” Key areas of focus to address this issue include:

Developing investment solutions, insurance solutions, or a combination of both to provide reliable retirement income.
Offering advice services or products that help retirees manage their income effectively.
Considering whether guaranteed income solutions should be optional or if savers could be defaulted into such options within their 401(k) plans.
Exploring in-plan versus out-of-plan options for guaranteed income solutions.

Given that one of ERISA’s primary objectives is to protect retirement assets, future legislation may be aimed at supporting the income phase of retirement. Lawmakers, regulators, and industry stakeholders will likely consider how best to balance asset protection with the growing need for guaranteed income solutions in retirement plans.

ERISA 50: Future

With a deeper understanding of the foundational goals of ERISA, we can better predict how retirement plans may continue to evolve to protect and safeguard retirement assets. Here are five changes we expect to see to improve retirement savings in America.

1) Expansion of 401(k) Market

SECURE 2.0 has set the stage for broader adoption of DC plans

Tax Credits for Small Employer Plans: Offering 100% coverage of administrative costs (up to $5,000) for the first three years to incentivize small businesses to establish retirement plans.
The Federal Savers Match: This initiative increases savings incentives for lower-income individuals, providing additional support for those with joint incomes below $71,000.
Mandatory Automatic Enrollment: New retirement plans are now required to automatically enroll participants, helping workers begin saving for retirement without the need for proactive enrollment, which has been shown can significantly boost participation rates.
Automatic Portability Between 401(k) Plans: This feature allows retirement assets to move seamlessly between employer-sponsored plans, reducing the risk of cash-outs and preserving long-term retirement savings.

2) Development and Growth of Pooled Employer Plan Market

Pooled Employer Plans (PEPs) are designed specifically to benefit small businesses, allowing them to join together to offer retirement benefits at reduced cost and with simplified administration.

3) Growth of Personalized Solutions

Not all retirement savers have the same life experiences or journey to retirement. As a result, more personalized solutions are entering the market from personalized investment portfolios to personalized advice platforms to personalized communications to participants.

4) Expansion of Employer-Based Education and Advice

Employer-based plans allow sponsors to provide financial education and advice to plan participants through a scalable and hybrid (digital and human-based) advice platform.

5) Integration of Insurance-Based Solutions to Support Retirement Phase

Insurance solutions are generally the only products that can provide guaranteed, longevity protecting income solutions in DC plans. Integrated solutions may create a better participant experience and allow these solutions to be broadly utilized by plan participants resulting in reduced costs and expanded access.

Quarterly Snapshot

Target date fund (TDF) flows in Q3 were reported to be either lower than or in line with the prior quarter. Plan participants continue to seek more stable investments as we see inflows in bonds compared to larger outflows from equity. Year-to-date asset class performance has been largely positive across equity and fixed income, with the only exception being commodities. Active managed outperformance has been most pronounced in emerging market equity and intermediate term bonds.

Net Target Date Fund Investment Flows

Source: Strategic Insight, Simfund. As of September 30, 2024. For open-end mutual funds only. For illustrative purposes only.

Net New Investment Flows

Source: ICI “The U.S. Retirement Market, Second Quarter 2024.” As of Q2 2024 (latest available). For illustrative purposes only.

Asset Class Performance

Source: Morningstar. As of September 30, 2024. For illustrative purposes only.

Active Management Performance

Source: Morningstar. As of September 30, 2024. Net of fees. Asset class categories based on Morningstar’s Style Box. Please refer to the disclosures for benchmarks. For illustrative purposes only.

Indices referenced in each category: Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap Value (Russell 2000 Value Index), Small Cap Growth (Russell 2000 Growth Index), International Equity (MSCI EAFE Index), EM Equity (MSCI Emerging Markets Index), Intermediate Bonds (Bloomberg US Aggregate Bond Index). EM = Emerging Markets. Please refer to the disclosures for additional definitions.

Past performance does not guarantee future results, which may vary.

² Small Business & Entrepreneurship Council, Bureau of Labor Statistics, US Small Business Administration Office of Advocacy, US Census Bureau, and Goldman Sachs Asset Management. As of October 2024.

Defined Contribution Quarterly 4Q 2024: ERISA 50: Past, Present & Future

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Risk considerations and disclosures

Glossary

A 401(k) plan is an employer-sponsored, tax advantaged retirement savings plan. 401(k)s are largely self-directed: Plan participants decide how much they would like to contribute from their salary, and which investments from among those offered by the plan they would like to invest in.

Active Management refers to an investment approach where managers select investments for a portfolio in an attempt to outperform the benchmark index.

ERISA: Employee Retirement Income Security Act

IRA: Individual Retirement Accounts

Volatility is a measure of variation of a financial instrument's price.

Risk Considerations

Environmental, Social and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated. Any ESG characteristics, views, assessments, claims or similar referenced herein (i) will be based on, and limited to, the consideration of specific ESG attributes or metrics related to a product, issuer or service and not their broader or full ESG profile, and unless stated otherwise, (ii) may be limited to a point of time assessment and may not consider the broader lifecycle of the product, issuer or service, and (iii) may not consider any potential negative ESG impacts arising from or related to the product, issuer or service.

All investing is subject to risk, including the possible loss of the money you invest.

Target Date Funds are subject to the risks associated with the underlying funds in which they invest. These risks change over time as the fund’s asset allocation strategy adjusts as it approaches its target date. There is no assurance any target date fund will achieve its investment objective. The principal value of an investment in a target date fund is not guaranteed at any time including at its target date.

You could lose money by investing in money market funds. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

Equity investments are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. Different investment styles (e.g., “growth” and “value”) tend to shift in and out of favor, and, at times, the strategy may underperform other strategies that invest in similar asset classes. The market capitalization of a company may also involve greater risks (e.g. "small" or "mid" cap companies) than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements, in addition to lower liquidity.

International securities may be more volatile and less liquid and are subject to the risks of adverse economic or political developments. International securities are subject to greater risk of loss as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Because the strategy has exposure to the commodities markets, it may subject the strategy to greater volatility than investments in traditional securities. Investments in commodities may be affected by changes in overall market movements, changes in interest rates, or factors affecting a particular industry or commodity. Commodities are also subject to social, political, military, regulatory, economic, environmental or natural disaster risks.

Mutual funds are subject to various risks, as described fully in each Fund’s prospectus. There can be no assurance that the Funds will achieve their investment objectives. The Funds may be subject to style risk, which is the risk that the particular investing style of the Fund (i.e., growth or value) may be out of favor in the marketplace for various periods of time.

The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.

General Disclosures

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Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

Bloomberg US High Yield Index covers the universe of fixed rate, non-investment grade debt.

Bloomberg US Long Government/Credit Index is a broad-based flagship benchmark that measures the non-securitized component of long maturity (10+ years) bonds in the US Aggregate Bond Index. It includes investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities.

MSCI EAFE Index is a market capitalization weighted composite of securities in 21 developed markets.

MSCI Emerging Markets Equity Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Russell 1000 Growth Index is an unmanaged index that measures the performance of the large cap growth segment of the US equity universe.

Russell 1000 Value Index is an unmanaged index of common stock prices that measures the performance of the large cap value segment of the US equity universe.

Russell 2000 Growth Index is an unmanaged index of common stock prices that measures the performance of the small cap growth segment of the US equity universe.

Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Russell 2000 Value Index is an unmanaged index of common stock prices that measures the performance of the small cap value segment of the US equity universe.

S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

S&P GSCI Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

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Date of first use: October 31, 2024