The Accidental Plan Sponsor— and the evolving future of retirement

We have been bumping into Josh Cohen here and there since our early days in the state facilitated space. That’s because he loves this topic of retirement savings and income adequacy. He’s also deeply curious about the evolution of the industry. How is it that plan sponsors became plan sponsors – and why do things work the way they do? Josh is a Managing Director with PGIM working with large defined contribution plans on investment issues ranging from plan design, Qualified Default Investment Alternatives (QDIA), implications of regulatory change and implementation. We caught up with Josh to talk about his new podcast, and intriguing results from PGIM’s latest defined contribution survey.

Josh Cohen, tell us about your role and your team at PGIM. And what is PGIM?

PGIM is the asset management businesses of Prudential Financial – we’re a top 10 asset manager. I head the institutional defined contribution (DC) effort. My role is to raise PGIM’s presence in the DC market by providing insights and thought leadership to DC decision makers at plan sponsors and their consultants, and helping them when there may be PGIM products and solutions that could benefit their plans and participants.

Talk about insights – we love your new podcast, The Accidental Plan Sponsor, where you focus on the challenges, dilemmas, and history of plan sponsorship in America. Where did this idea come from?

Thanks for that compliment, that’s very nice of you. It's been getting great feedback. For many years I've had this idea to write a book on this topic. I had the title rolling around in my head for a while. My marketing department eventually convinced me that people don't read books anymore, even though I read books, and that podcasts are the new way to tell a story.

              What podcast? Check it out here!

I'm really glad I'm doing it as a podcast, because I think that it is an interesting format for this story. And I really am trying to tell the story of how employers got in the role, in this country at least, of having the primary fiduciary and administrative responsibility of running retirement plans for the average American worker.

These are folks who have been my clients for 25 years now. For the most part, these are really good people, many have become friends of mine. And I think they're really trying to do the right things. At the same time I've observed, and I think many of them have observed, they're often stuck when it comes to moving forward and innovating within their plans.

I wanted to ask the questions about how they got in this role in the first place -- what's working, what's not -- and are there other ways we should think about the system to help move it forward? And that's the journey I'm on with this podcast.

It’s been a great listen, and we invite our readers to give it a test drive. What are some of the interesting things you’ve heard?

First of all, it's funny, I called it the Accidental Plan Sponsor for a reason. I’m focused on telling the story of the people who have shaped this industry in different ways. And it is so interesting how many of them found their way in their roles by accident. Many of them didn't know what ERISA was or knew much about retirement plans. And this is the story of how they found their way to becoming influencers in this field.

Everyone has their own journeys, but oftentimes it’s not a straight line and their paths are influenced by coincidences, and happenstances, and the conversations they've had along the way. It’s interesting that not everything is always drawn up on a chalkboard start to finish, whether it's our employer-based retirement system or individual’s life journey in this space.

We must ask: from a people perspective, have you had a favorite guest so far?

Well, they say you're not supposed to have a favorite child and you're also not supposed to have a favorite podcast guest. But I would say if I did have one, it would be Frank Cummings -- all the way back from Episode One.

There are a lot of reasons Frank is so fascinating. He's 91 years old. He was the chief congressional aide to Senator Jacob Javits, who was really the driving force in Congress behind passage of ERISA – the Employees Retirement Income Security Act of 1974. Interestingly, Frank got into this field by accident. Ten years earlier he was the lawyer for Studebaker, when Studebaker and their pension plan famously went bankrupt. Many of their pensioners did not get what was promised to them. That was eye-opening to Frank. He found himself thinking, we really have to fix this. There's a pension problem in this country, and we have to work on it. Prior to this there was not really any significant legislation related to pension commitments or retirement income security.

And he got hooked up with Senator Javits, but it was a 10 year journey to get from Studebaker to the passage of ERISA. And it was so interesting to document that story of what it took to get ERISA passed. Many of the issues they were dealing with then are still issues today. And Frank was just articulate, funny, and had great stories to tell. And I was glad that I could capture his story in recorded form. And hopefully it's a good legacy that we now have it this way.

Great interview -- we also loved your “outtakes with Frank” episode.

Yes! There were so many stories I wanted to keep in, so all the great stuff that hit the editing room floor went into our first outtakes episode.

What’s next in retirement plan history podcast-land?

We just wrapped up our season this month. And then we're going to have extras for the rest of this season: bonus episodes and outtakes.

A few weeks ago I had Jerry Schlichter and Jamie Fleckner talking about lawsuits. And I finished the season focusing on consultants, including Don Ezra, the legendary Russell consultant, and Rich Nuzum of Mercer.

My goal for next season is to start looking at what other countries are doing and profile how other countries tackle this question. Then maybe we’ll come back to the US and look at what others have proposed to address some of the things I’ve identified in Season One. That could include state programs, multiple employer plans, federal approaches, and other ways to address the employer-based retirement system that we have today.

We love it. Let’s talk about other thought leadership: PGIM does an annual survey on the evolving defined contribution landscape. So what caught your attention in the 2021 results?

Yes. We looked at a lot of different facets and the evolving nature of DC plans. One area I would highlight is the use of alternative investments. This is something we also talked about in a few podcast episodes, including Episode Four.

              And here’s that 2021 Annual Survey

I guess one of the things that caught my eye is that fewer than 10% of plan sponsors said they incorporate alternatives into their defined contribution plan. When they do, it’s usually within a target date fund. But when you ask the reason why they don’t include alternatives, only 28% of them said it’s because they don't believe in the investment rationale.

Most others cited reasons around participant education, operational concerns, fiduciary concerns. To me this ties back to the accidental plan sponsor theme. You have many employers who see that there could be a benefit to delivering these types of institutional investments used by other institutional investors – including defined benefit plans and sovereign wealth funds -- and make that available to the individual participant. But these other concerns are getting in the way of doing that.

Best practice is to incorporate alternatives not as standalone options, but a part of a diversified solution like a target date fund. So it's interesting that the number one reason people said they don't include it is because of participant education concerns. The reality is that you don't have to provide specialized education when these are a part of more diversified portfolios. So the investment education concerns shouldn't, in our view, be as big a factor as it seems to be.

What else would you highlight from the 2021 survey?

One of the other emerging areas we touched on was ESG, which I think is still in its early stages of people figuring it out. We definitely see deepening interest in that topic.

We also looked at the outsourced CIO (Chief Investment Officer) model. We did a deep dive there because we do see that as a continuing area of growth. This is true both for service providers, and for plan sponsors who increasingly want to implement more thoughtful and innovative solutions, but don't feel like they have the expertise, resources or the scale to be able to deliver on some of these ideas. One potential solution many are starting to look at is the outsourcing model, which potentially can help them better implement those types of solutions that they don't feel they can do on their own.

From a plan sponsor perspective, the most common area where we see outsourcing used is in the $250 million to $500 million plan size range. However, the providers told us that they are seeing this increasingly move up market.

Up-market, when you say up-market, you mean larger plans.

Yes. Actually the most fascinating answer in this section was this: we asked both plan sponsors the top reasons why they decided to use OCIO (Outsourced Chief Investment Officer services) and we also asked OCIOs what they thought the top reasons were. There's pretty good alignment.

But in fact the number one reason that plan sponsors cited for using OCIO was their desire for expertise in implementing institutional quality structures. Whereas OCIOs ranked that need that near the bottom. And OCIOs thought the main reason plan sponsors outsource was perceived mitigation of fiduciary risk, followed by the thought that plan sponsors don't have enough resources. So I thought that gap in perspectives was pretty interesting.

Fascinating! We know you are also working on some important thinking related to lifetime income.

You know, I think the next evolution in DC plans will be solving for income. As Bill Sharpe has famously said, solving for lifetime income is the nastiest, thorniest problem in all of finance. If it's hard for a Nobel prize winner, imagine how the average participant feels.

It's also a challenge for plan sponsors from both a fiduciary and a solutions perspective. We think that it's not just a one-size-fits-all solution when you start to solve for income. It takes a lot of pieces. This may range from enhancing your plan design to offering better, more personalized advice and solutions. It may include better non-guaranteed types of investments that can help with managed systematic withdrawals, as well as guaranteed investments where it makes sense to hedge longevity risk.

We asked plan sponsors: what are you offering your retirees today to help them with retirement income. The two most popular answers were stable value funds and the retirement vintage of the sponsors’ target date fund series. These are both good, but they're not necessarily purpose-built to solve for lifetime income. So it seems to me that plans do need to evolve to provide lifetime, but again, we don't think it's just a product approach. We think it's very much a solutions type of approach that's needed to evolve plans over time to be more supportive of lifetime income.

It seems to us that we're still pretty early with regard to solutions that feel personal and automated.

Yes, that's right. I think we need professional management, but we also need personalization. Target date funds brought that professional management, but it didn't quite bring the personalization that's truly needed if we want to solve for retirement income.

Another really interesting question we asked plan sponsors is: do you believe there will be a need for you to offer retirement income solutions using a technology-enabled customized solution for pre-retirees and retirees.

About 73% either agreed or strongly agreed with that statement. We know not everyone's going to have the same needs and wants in retirement in terms of their spending patterns. People will also have different assets at their disposal, from Social Security to defined benefit to what's in their DC plan. So one size fits all becomes harder and harder. So we are going to have to use technology – yes it is a buzzword -- but we are going to have use technology in a cost-effective way bring more customization to individuals.

Well, you’ve got us thinking about automated ways to aggregate people's actual assets, like Mint for your retirement assets and income streams.

That's right.

Okay, Josh, our final light-hearted question for today – any fun summer activities to report?

Well, it has been fun! In some ways we got a little bit back to normal with the kids being able to go back to camp. We got to visit my parents who live in Maryland, which we haven't been able to do. So in many ways the fun for us is a little bit more normalcy than before.

I'm also using this opportunity to add a home office to my house. I've never gone through a project like this before, so I'm not sure I'll call it fun per se, but it's been interesting to work with contractors and make decisions around what that new office will look like.

We want to see your pictures when it's done. Thank you for this very timely update, Josh!

Want more? You can connect directly with Josh Cohen here. You can follow Josh’s work at PGIM here. You can also connect with Josh on LinkedIn here.

This piece was featured in the August 26, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.