The Top Defined Contribution Plan Priorities for 2025

Defined Contribution Plan Priorities for 2025

Defined contribution (DC) plans are among the most common ways for U.S. workers to save for retirement. U.S. DC plans totaled $12.5 trillion in assets as of the third quarter of 2024, representing 33% of all U.S. retirement assets.¹ This creates tremendous responsibility for plan sponsors as they provide and manage retirement benefits on behalf of their employees. Consider our take on six priorities for DC plan sponsors in 2025.

1. Targeting Target Date Funds (TDFs)

The Department of Labor’s guidance, Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries, outlines best practices for TDF selection.² Key takeaways include: 

• establishing a process for selecting and comparing TDFs and for periodic review;
• understanding the TDFs’ underlying investments and the glidepath;
• reviewing the TDFs’ fees and investment expenses;
• taking advantage of all available information in the review and decision-making process;
• documenting the process; and
• developing effective employee communications.

Implicit in this guidance are three key points to consider. First, as with any investment process, it is important to understand the purpose of the investments is to help your unique group of employees invest for retirement. Second, analyze the characteristics of the workforce by collecting workforce demographics, investment behavioral trends — commonly found in reports produced by the recordkeeper — and other workforce data. Finally, establish the plan sponsor’s goals for the plan and overall investment beliefs that will serve as a guide when evaluating various TDFs. Making prudent investment decisions requires these elements to drive the analysis and identify TDFs that are suitable for your workforce. 

Learn more: Plan Sponsor Perspectives: Target Date Fund Selection and Monitoring.

2. Understanding Investment Fees and Share Classes

We often see situations where the plan sponsor goes through the effort of finding a great investment strategy and then selects a less-than-optimal investment vehicle. For example, a plan sponsor (or their advisor) might select a mutual fund share class for which the expense ratio includes revenue-share dollars, which are paid to the advisor or collected by the recordkeeper to credit against its fees, rather than using a zero-revenue share class. In other cases, a plan might be eligible (that is, meet the minimum investment threshold) for a collective investment trust (CIT) vehicle with a lower expense ratio than the mutual fund version(s) of the investment strategy. Often, these choices or oversights result in plan participants paying higher investment fees and recordkeeper fees than if the plan sponsor had optimized the choice of investment vehicle.

We suggest plan sponsors consider the impact on participants of their current mutual fund share classes, if not zero revenue, and whether the plan qualifies for same CIT strategy. Generally, we recommend our clients use zero-revenue share classes of mutual funds or collective investment trusts, as applicable, as they provide greater fee transparency and often lower overall fees, all else equal, than plans utilizing revenue-sharing share classes.

Learn more: Plan Sponsor Perspectives: Understanding Investment Vehicles and Fees.

3. Evaluating Investment Lineup Structure 

Most committees’ routine investment reviews follow a similar format: a look at the economy and capital markets followed by a review of the performance and risk metrics of the investment menu. If there are funds on watch or in need of replacement, changes are discussed. While routine reviews of plan fiduciaries are expected, we suggest supplementing with a periodic review of the investment lineup structure, meaning investment categories (Figure 1) and whether they are implemented with active management or passive management. We suggest this type of review at least every three years or earlier if workforce demographics change in a meaningful way (for example, as the result of an acquisition). 

Figure 1 – General Investment Structure

In Figure 1, we show a generic investment lineup structure. To evaluate the appropriateness of the lineup structure, plan sponsors should start by plotting the existing investment menu using the columns shown. This visualization can facilitate discussion about whether the current structure is appropriate or if investment categories should be altered. Factors for the discussion could include participant group investment knowledge, age, demographics, and extent of retiree population in the plan.

Learn more: The Art and Science of Defined Contribution Plan Investment Design.

4. Offer Comprehensive Employee Financial Education Resources

In 2024, PNC conducted a Financial Wellness in the Workplace Study that surveyed both employees and employers to better understand how financial wellness is prioritized and addressed in the workplace. Employees reported spending at least three hours per week worrying about personal finances, with 68% stating that financial stress negatively impacts their mental health. From the employer perspective, three out of four employers recognized that workers’ financial stress negatively affects workplace operations.³

From our experience providing comprehensive employee financial education to our clients, we have seen firsthand how financial wellness benefits can help employees improve their financial health and reduce these challenges. While traditional group meetings have historically played a significant role — particularly for workforces where a large percentage of the population is not at a desk — we are finding a meaningful increase in the number of plan sponsors (and their employees) looking for individualized one-on-one meetings with financial educators. Our financial educators report that these private meetings enable employees to have candid conversations about their unique financial challenges. In this environment, individuals feel more at ease, allowing them to address difficult topics and receive personalized education.

This results in participants being better equipped with the knowledge and confidence to make informed financial decisions. We believe that by investing in comprehensive and personalized financial education, employers can support their employees’ financial wellness while also enhancing productivity and morale across the organization.

Learn more: 2024 Financial Wellness in the Workplace Report: The Evolving Needs of the Multigenerational American Workforce.

5. Examining Committee Structure and Responsibilities

Employment trends from “the great resignation” to “the big stay” and “the great reshuffling” illustrate the mobility of today’s workforce. These changes also negatively impact a company’s retirement plan committee. Reasons might vary from changing positions to leaving the company or retirement. 

Committees should get back to basics in 2025 by doing the following:

• document the committee structure and responsibilities;
• build an onboarding education checklist for new committee members;
• maintain a calendar structure for fiduciary continuing education; and
• confirm the fiduciary file is up to date, including the investment policy statement, executive summaries, and investment reporting.

6.  Monitoring Trends in Litigation and Regulation 

With significant provisions of the 2017 Tax Cuts and Job Acts expiring at the end of 2025, there is possible consideration of new tax legislation. Changes to tax-advantaged retirement programs can come with tax legislation, so it will be important for plan sponsors to stay current on potential changes.

From a litigation standpoint, two major trends shaped 2024: plan fees and usage of forfeiture assets.

Plan fees remain a perennial focus. Has the committee fulfilled its fiduciary duty to monitor plan expenses so that they are reasonable for the services provided? It is important to note that this topic covers both vendor expenses, such as recordkeeping and advisor expenses, and investment management expenses, such as choice of investment manager or the share class utilized.

The current wave of litigation regarding usage of forfeiture assets is a seemingly new phenomenon. The litigation has focused on if plan sponsors are permitted to use forfeiture assets to reduce employer contributions, or if they are limited to paying permissible vendor expenses or distributing the funds to participant accounts.

With the potential for change and continued uptick in litigation, we recommend plan sponsors collaborate with their advisors to stay on top of these and other trends in regulation and litigation in 2025.

Plan sponsors serve a critical role in managing retirement programs effectively and in a way that helps create positive retirement outcomes for plan participants. By keeping these six priorities front of mind, plan sponsors can focus their efforts where they have the potential to have the most impact. For more information, please contact your PNC representative.

Sources

1. Release: Quarterly Retirement Market Data, Second Quarter 2024 | Investment Company Institute

2. Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries, DOL, Feb. 2013

3. Financial Wellness in the Workplace Report 2024