As defined contribution (DC) plans continue to evolve, plan sponsors face increasing complexity in managing retirement benefits. With $12.5 trillion in assets (3Q 2024) and accounting for one-third of all US retirement assets, DC plans carry significant responsibility for ensuring strong financial outcomes for participants1. In 2025, plan sponsors must focus on optimizing investment strategies, reducing costs, and enhancing participant education to improve retirement readiness.
The top priorities for DC plans in 2025 include critical areas such as target date fund selection, fee transparency, investment lineup evaluation, and staying ahead of regulatory and litigation trends.
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 selection2. 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
- 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.
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 its 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 (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. We recommend plan sponsors 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.
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.
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 whether 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.
Offering Comprehensive Financial Education Resources
In our 2024 Financial Wellness in the Workplace Study, employees reported spending at least three hours per week worrying about personal finances, with 68% stating that financial stress negatively impacts their mental health. And three out of four employers recognized that workers’ financial stress negatively affects workplace operations3.
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 – there is a meaningful increase in the number of plan sponsors and their employees looking for individualized one-on-one meetings with financial educators. These private meetings enable employees to have candid conversations about their unique financial challenges.
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 the 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
- Confirm the fiduciary file is up to date, including the investment policy statement, executive summaries, and investment reporting
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 the potential for 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 new phenomenon. The litigation has focused on whether 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, plan sponsors should collaborate with their advisors to stay on top of these and other trends in regulation and litigation in 2025.
Plan sponsors play a pivotal role in shaping the financial future of millions of employees. By prioritizing investment optimization, cost efficiency, governance, and participant education, they can enhance retirement outcomes and reduce fiduciary risks. As market conditions, workforce demographics, and regulatory landscapes evolve, continuous assessment and strategic decision-making will be key to ensuring DC plans remain effective, competitive, and aligned with participant needs. By focusing on these six priorities, plan sponsors can drive meaningful impact in 2025 and beyond.
Disclosures
The material presented herein is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. The information contained herein was obtained from sources deemed dependable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice.
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