The Biggest Financial Mistakes I See Plan Sponsors Make Part 2

The 3 Biggest Investment Mistakes I See Plan Sponsors Make

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By Mark Olsen, Managing Director at PlanPILOT

Managing a retirement plan demands attention to detail, foresight, and unwavering commitment. Financial advisors and plan sponsors bear the weight of managing funds that represent not only a lifetime of savings for many participants but also their aspirations for a comfortable retirement. While the financial landscape continually shifts and new best practices are developed, it’s possible for certain lapses in oversight to occur and impact the integrity of a retirement plan, especially as it relates to investments.

In my three decades of experience, I’ve seen a number of mistakes with retirement plans. Sometimes even seasoned plan sponsors fall for certain investment pitfalls. As we delve deeper, we’ll highlight three specific mistakes in the realm of investments that, while they might appear minor at first glance, can result in considerable financial and legal consequences over time. Addressing these errors is essential. In doing so, plan sponsors not only elevate the prospects of their participants but also underscore their commitment to diligence, transparency, and proficient investment management.

1. Not Documenting and Benchmarking Your Plan’s Specific TDF (Target-Date Fund) Funds

Benchmarking your plan’s specific target-date funds (TDFs) is crucial for myriad reasons, with cost savings being one of the most significant. By failing to benchmark, plan sponsors might be inadvertently sidelining better-performing funds that come with lower fees. This direct oversight could mean participants’ retirement savings aren’t growing at their full potential, making it harder for them to realize their retirement goals. The fees specific to target date funds has been central in the fiduciary lawsuits.

Furthermore, transparency becomes an issue when decisions about fund selection aren’t documented. Participants, auditors, and stakeholders might be left in the dark about why certain TDFs were chosen over others. 

Beyond the lack of clarity, there’s also the looming risk of fiduciary breach. As a fiduciary, we want to act in the best interest of participants. Yet without proper benchmarking and clear documentation, proving this fiduciary prudence becomes challenging and can lead to unnecessary complications down the road.

2. Not Updating (or Not Even Creating) an IPS (Investment Policy Statement)

An investment policy statement (IPS) is the backbone of a retirement plan’s investment strategy. Without a systematic process for reviewing and selecting investments, inconsistencies and haphazard decisions can creep in. A clear, updated IPS not only provides a road map for making sound investment decisions but also shields plan sponsors from potential legal ramifications by demonstrating due diligence and prudent decision-making, verifying they’re meeting their fiduciary responsibilities.

A missing or outdated IPS is also a potential cause of confusion for everyone involved. Advisors might find it hard to justify their investment decisions, while plan participants could be left not understanding the logic behind the funds offered. Inconsistencies could arise when there’s a need to evaluate underperforming funds or decide on their replacements. A well-maintained IPS reviewed regularly can aid in the smooth functioning and credibility of the retirement plan.

3. Not Regularly Reviewing the Share Classes Offered to Allow the Availability of the Lowest-Cost Options

One of the essential aspects of offering a retirement plan is ensuring participants have access to the most cost-effective investment options. Share classes in mutual funds can vary, and each class comes with a unique fee structure. Not all plan sponsors take the time to revisit these share classes periodically, potentially leading to participants shouldering higher fees than necessary. Over time, these added costs can erode the returns and compound to sizable reductions in participants’ savings.

In addition to the monetary implications, there’s also the matter of fiduciary responsibility. Offering the most cost-effective options falls squarely within this duty. Overlooking this critical aspect not only harms participants but also exposes sponsors to potential litigation and reputational risks. Maintaining a watchful eye on share classes keeps participants receiving the best value for their contributions.

Stay Ahead As a Plan Sponsor. Partner With Us.

Leading the way as a plan sponsor comes with its challenges, complexities, and ample room for mistakes. At PlanPILOT, we’re committed to partnering with you, equipping and informing you to make the best decisions for your plan participants.

If you’re determined to stay ahead in your sponsorship role and provide unmatched retirement solutions, let’s collaborate. You can schedule a time for us to meet at (312) 973-4913 or send me an email at mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

Top Mistakes

The Top 5 Mistakes I See Plan Sponsors Make

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By Mark Olsen, Managing Director at PlanPILOT

In the world of retirement plans, ensuring favorable outcomes for both sponsors and participants hinges on sidestepping a myriad of potential mistakes. I’ve previously shared my top lessons for retirement plan sponsors, which are certainly important to focus on. Yet it would also be helpful to know not just what we want to do, but what we want to avoid. To aid sponsors in this endeavor, we have crafted a two-part series that examines the most common errors and offers guidance on how to prevent them. 

In this first chapter, we zero in on plan administration, a foundational aspect of orchestrating a successful retirement plan. Taking a proactive and risk-minimized approach to plan administration will serve as a springboard for our next article into the nuances of investments. That said, here are five mistakes I see made frequently with regard to plan administration.

1. Lack of a Diverse Plan Committee

A robust retirement plan starts with a diverse plan committee, encompassing a range of perspectives to foster a holistic strategy that meets the needs of all participants. Unfortunately, many committees fall short, leveraging a narrow viewpoint that fails to resonate with a varied participant base. 

To avoid this pitfall, we advocate for the formation of a committee rich in diversity, tapping into various professional backgrounds, ages, genders, and ethnicities. This approach not only nurtures well-rounded discussions but also facilitates informed, encompassing decisions that cater to a broader spectrum of needs and preferences. 

2. Not Benchmarking and Reviewing Your Plan Every 3-5 Years

In a rapidly evolving financial environment, static strategies often lead to diminished outcomes. A critical yet frequently overlooked practice is the regular benchmarking and reviewing of your retirement plan, ideally every 3-5 years. This process not only helps keep your plan fresh and aligned with current trends but also aids in keeping the fees in check, preventing participants from being overburdened with unnecessary costs. 

Regrettably, it is common to see plans gathering dust, with outdated strategies that no longer serve the best interest of the participants. Stale plans can result in higher fees and potentially lesser returns, impeding the financial growth of the plan’s beneficiaries. 

3. Not Understanding and Explaining Employee Eligibility

One aspect of plan administration that can often be misinterpreted or overlooked is understanding the eligibility criteria for employee participation in retirement plans. Proper comprehension of employee eligibility not only ensures you are in compliance with regulatory mandates but also fosters inclusivity and fairness in the retirement plan you offer. Just as you educate employees about investment options and learning about risk literacy, you should also educate on employee eligibility.

Mistakes in this area can potentially lead to legal ramifications, not to mention dissatisfaction and mistrust among your workforce. It is not uncommon to witness scenarios where inadequate knowledge about employee eligibility results in missed opportunities, hindering employees from reaping the benefits they are entitled to. 

4. Not Having Frequent Committee Meetings and Recording Notes

A well-oiled machine operates smoothly with regular check-ins and adjustments; similarly, a retirement plan thrives on frequent committee meetings where vital decisions are made and strategies are formulated. However, it’s not just the meetings that are crucial; documenting the discussions, decisions, and action plans formulated in these meetings stands equally important. 

Unfortunately, some plan sponsors overlook the need for documentation, creating a void of accountability and potentially fostering environments ripe for inconsistencies and misunderstandings. This not only dampens the effectiveness of the meetings but can also entail legal repercussions.

5. Late Remittance of Employee Deferrals

Timely remittance of employee deferrals is more than a regulatory requirement; it’s a cornerstone of trust and reliability in a retirement plan. Delaying these remittances can not only attract regulatory scrutiny and penalties but also erode the faith employees place in the plan, possibly affecting their financial stability in retirement. 

Ready to Sidestep These Common Mistakes? Let’s Talk.

Navigating the intricacies of plan administration doesn’t have to be a solitary journey. At PlanPILOT, we stand ready to guide you every step of the way, helping you avoid the common pitfalls that can hinder the success of your retirement plan. 

If you’d like to minimize mistakes and maximize your retirement plan, we’d love to help. You can call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

2023-8_Raising Risk Literacy in Sponsor Plan Oversight

Raising Risk Literacy in Sponsor Plan Oversight

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By Mark Olsen, Managing Director at PlanPILOT

Plan sponsors play a pivotal role in helping participants understand and pursue their ideal retirements. One crucial way they do that is through well-rounded and accessible education, especially in areas where the general public lacks awareness or understanding. However, there is a crucial aspect of participant education that has often been given less attention: risk literacy. 

Although many plan sponsors excel in providing foundational knowledge about retirement plans, the critical role of comprehending the risks inherent in financial decision-making is often undervalued and overlooked. This doesn’t represent a setback but, rather, a significant opportunity. By integrating risk literacy into participant education, plan sponsors can arm their participants with the tools to make wiser, more comprehensive financial choices. 

The Current State of Plan Sponsor Education Is Incomplete

For years, plan sponsors have conscientiously been imparting essential knowledge on retirement plans. This includes understanding the basics of retirement savings, the mechanics of contribution matching, the importance of consistent saving, and the variety of plan options available. They help keep participants well-versed on tax advantages, withdrawal rules, and the potential benefits of diversifying their investments.

However, these educational efforts, while undeniably important, fall short of providing a comprehensive understanding of retirement savings. The element that is frequently missing (and arguably as important as the rest) is risk literacy. This absence creates a blind spot for plan participants. They may be knowledgeable in how to save but lack the critical understanding of how to make informed decisions that take into account the inherent risks associated with financial investments. These risks run the gamut from volatility risk to inflation risk to interest rate risks—and all impact the unpredictable terrain of financial markets. 

How Risk Literacy Aids Good Financial Decisions

Understanding risk literacy is not just an optional skill; it’s an essential part of making sound financial decisions. It helps participants distinguish between different types of investment risks, and equips them with the knowledge to assess the potential impact these risks might have on their retirement savings. 

Yet according to TIAA in a personal finance study, comprehending risk is one of the lowest rated financial subjects, with only 35% of questions surrounding risk answered correctly. The benefits can be significant, according to Annamaria Lusardi, a George Washington University professor, who says, “Having higher risk knowledge is correlated with being less likely to be financially fragile.”

Furthermore, risk literacy encourages a deeper understanding of concepts like probability and uncertainty—critical components in financial decision-making. When participants can analyze the likelihood of different outcomes, they’re better prepared to handle fluctuations in the market. They can appropriately calibrate their investments, striking a balance between risk and return that matches their individual tolerance for risk and their long-term financial goals. 

Risk literacy also fosters resilience in the face of financial upheaval. A risk-literate participant may not be easily swayed by market volatility, but can have the confidence to stay the course, understanding that short-term fluctuations are a normal part of the investment landscape. By promoting risk literacy, we empower plan participants with the tools to manage their retirement savings effectively, making them more financially stable in the long run.

How to Incorporate Risk Literacy Into Participant Education

Incorporating risk literacy into participant education may seem like a daunting task, but with a well-structured approach, it can be achieved. The first step involves expanding your educational material to include a module on the basic concepts of financial risk and uncertainty. This includes market risk, credit risk, interest rate risk, and the risk-return tradeoff. To effectively teach these concepts, consider leveraging interactive tools, like risk simulators or scenario-based activities. Real-life examples and case studies also serve as powerful tools, offering participants the much-needed context to relate abstract concepts to their own financial decisions. 

The next phase involves the evaluation and refinement of your approach. Regular assessments or quizzes can help gauge participants’ understanding and application of risk literacy, identifying areas that might need more attention. It’s crucial to cultivate an environment of open dialogue around financial risks, where participants feel comfortable asking questions, expressing concerns, and seeking additional help. Not only can this enhance understanding, but it can also empower participants to take control of their financial futures with greater confidence. With these strategies in place, your education program won’t just impart knowledge on retirement plans, but can also equip participants with the skills to navigate the financial landscape effectively.

Empower Plan Participants Through Risk Literacy

Introducing risk literacy into your curriculum is more than just adding another module—it’s about empowering your participants to make informed decisions for their financial future. By understanding risk and uncertainty, they’ll not only have the knowledge to make more prudent financial decisions, but also the confidence to navigate the complexities of the financial world.

At PlanPILOT, we help plan sponsors develop a well-rounded, customized educational program that helps meet your fiduciary duty and equips plan participants to make thoughtful financial decisions. If you’d like to risk literacy into your educational program for participants, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

2023-7_Evolving OCIO Landscape

What You Need to Know About the Evolving OCIO Landscape

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By Mark Olsen, Managing Director at PlanPILOT

In an increasingly complex financial landscape, managing endowments and foundations has never been more challenging. Markets are constantly evolving, compliance and due diligence requirements are intensifying, and regulatory landscapes are shifting. Amid this complexity, a comprehensive and focused approach to investing is not just desirable—it’s essential. 

At PlanPILOT, we aim to minimize fiduciary risk for institutional governance teams, and be diligent stewards of the investments they manage. This commitment aligns well with the role of an Outsourced Chief Investment Officer (OCIO), a rapidly growing investment model that is projected to manage a total of $3 trillion in assets by 2025. 

In this article, we’ll explain what an OCIO is, how it can benefit endowments and foundations, and the various types of OCIO services you can use. 

What Is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a specialized service in which an institution delegates a significant portion, if not all, of its investment management activities to an external expert. This model of investment management offers a holistic approach, overseeing all aspects of an organization’s investment portfolio. The OCIO is responsible for setting strategic asset allocation, making tactical investment decisions, handling manager selection and due diligence, and ensuring adherence to regulatory standards. 

Importantly, an OCIO is also accountable for investment performance. They operate under a fiduciary duty, which means they are legally obliged to act in the best interest of their client. This approach allows institutions to leverage the OCIO’s skill set, resources, and infrastructure, enabling them to focus on their core mission while having confidence that their investments are being professionally managed.

How an OCIO Can Benefit Endowments and Foundations

The decision to engage an OCIO is not taken lightly, and it’s driven by a multitude of key benefits this model offers. One of the primary advantages is the considerable back-end support provided by the OCIO. By overseeing the daily operations and administration of investment activities, the OCIO allows institutions to free up their time and resources, focusing instead on broader strategic goals. 

Moreover, an OCIO brings a wealth of investment experience to the table. With their deep knowledge of the financial markets, they offer strategic asset allocation advice, guide on manager selection, and provide risk management tactics—activities that demand considerable time, experience, and resources. This level of skill is particularly valuable for smaller organizations, which may lack the resources to maintain a fully staffed, in-house investment team. 

Compliance adherence is another area where an OCIO can make a significant difference. Given the increasingly complex regulatory environment surrounding managing investments, an OCIO can help keep your plan in compliance with all relevant laws and regulations, minimizing potential legal and financial risks.

Differentiation Among OCIO Providers

As the OCIO market continues to grow and evolve, differentiation among providers becomes increasingly pronounced. Some OCIOs offer a comprehensive, full-service solution, managing every aspect of your investment strategy, allowing institutions to work on other aspects of their organization. Others provide à la carte services tailored to your specific needs. Before requesting proposals from OCIOs, it would be wise to make a list of all areas you’d like help with so you know the key traits you are looking for in a provider. 

Additionally, some OCIO firms may have more niche investment strategies. Some of them offer ESG (environmental, social, and governance) investments, while others incorporate private equity into their investment strategy. Each of these strategies are polarizing topics in the investment world, so it’s important for you to know whether or not it’s right for your firm. 

After understanding the service offerings as well as any unique investment strategy, other key considerations should be their investment philosophy, performance record, risk management approach, and the depth and quality of their investment team. You also want to verify you understand their fee structures, and that the OCIO is a cultural fit with your organization. In a diverse and growing landscape, understanding these variations is crucial to find the most compatible OCIO partner.

Is an OCIO Right for Your Plan?

Are you grappling with the complexities of governing an endowment or foundation and implementing best governance practices? Now is the time to consider whether an OCIO might be right for you. An OCIO can provide a level of skill and support that enhances your strategy, confirms compliance, and ultimately helps your plan participants to experience better outcomes. With a tailored approach to your unique needs, an OCIO can be an invaluable partner for your endowment or foundation. 

At PlanPILOT, our goal is to help you find the best of class investment manager that meets the goals of your organization and all shareholders and decision-makers. If you’d like to start your search to find the best OCIO for you, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

Retirement Income Solutions for Plan Sponsors

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By Mark Olsen, Managing Director at PlanPILOT

By the year 2030, all baby boomers in the U.S. will be over the age of 65. With that threshold looming, along with an ever-changing economic landscape, the retirement planning process is being significantly reshaped. As people retire and expect to live for another 20 to 30 years, the need for sustained income during retirement has become increasingly crucial. As a result, defined contribution (DC) plan sponsors are adapting and seeking innovative solutions, including introducing income options in their plans. Facilitated by the SECURE Act, which eases the perceived fiduciary risks of such options, plan sponsors now have a broader toolkit to better cater to the diverse needs of their participants. 

In this blog, we’ll guide plan sponsors through this shifting landscape, covering key points to consider with this relatively new and increasingly popular plan structure. Our goal is to support you in shaping a retirement plan that is equipped for the complexities of the modern world and tailored to the varying needs of your participants and your company.

Historical Uses of Retirement Plans

Historically, retirement plans like 401(k)s and 403(b)s have been used to accumulate savings throughout a person’s career. These traditional plans have served as vessels for contributions, investment growth, and tax advantages, with the main goal being to build a substantial nest egg by the time of retirement. 

However, these plans didn’t inherently provide a structured way to distribute these savings as a regular income in retirement, instead leaving the retirees to self-manage their funds, often leading to the risk of outliving their savings. Now, with the changing demographics in our country and workforce, the focus is shifting toward incorporating retirement income solutions that also address this decumulation phase.

Understand Plan Participant Needs

Yet with every retirement plan, it’s best to fully understand the needs of your particular participants before undergoing a change to your plan. While a common concern for many retirees is a reliable, lifetime income, other aspects like control over assets, flexibility in case of emergencies, and potential for growth also play significant roles in their decision-making. They may also be looking for features such as death benefits and inflation protection. 

There are also a number of ways to “create” that income from a retirement plan. Some participants might prefer the security of a fixed annuity (which offers a guaranteed income from an insurance company), while others might prefer the potential higher returns of a managed drawdown plan. Therefore, plan sponsors need to have a deep understanding of their participants’ financial circumstances, risk tolerance, and long-term goals to select the most suitable solution.

Criteria for Retirement Income Solutions

When assessing retirement income solutions, there are several crucial factors to consider.  Does the solution offer any type of guaranteed income? While it varies person to person, many retirees prefer this component as it provides the certainty of an ongoing income stream during retirement, offering peace of mind. 

However, some will want the ability to capture potential market upside so they can potentially enhance their income by benefitting from positive market trends. 

Another key factor is liquidity, which provides participants the flexibility to access their funds in times of emergencies or unexpected financial needs. If a retiree doesn’t have an adequate emergency fund outside of their retirement plan, then access to some of their retirement funds becomes even more pivotal.

Longevity protection is also a key consideration, ensuring participants won’t outlive their assets in an era where the average life expectancy is 79 years of age.

These are just a few of the many criteria plan sponsors and participants should consider. A comprehensive understanding of these factors, along with additional ones tailored to the unique needs of the participant base, provides the selection of an optimal retirement income solution.

Participant Education and Support Is Key

As plan sponsors navigate the complex terrain of retirement income strategies, it’s critical to remember that participant education and support form the cornerstone of successful implementation. These solutions, often intricate and nuanced, demand a certain level of understanding to fully maximize their benefits. Robust educational initiatives can aid participants in grasping the mechanics of their selected income solution, including the inherent risks, benefits, and costs, and how it fits into their broader retirement strategy. 

Further, well-rounded participant education can help increase confidence in the plan, and might lower the risk of litigation. In essence, fostering an informed participant base is as critical as selecting an appropriate income solution. After all, an empowered participant is more likely to make prudent decisions that align with their retirement goals, ultimately promoting financial stability in their post-career years.

Should You Implement a Retirement Income Plan?

If you’re a plan sponsor considering the introduction of a retirement income solution, now is the time to take action. The ever-evolving landscape of retirement planning, coupled with the enhanced longevity of the modern workforce, makes it essential to at least consider income solutions that address these realities. 

At PlanPILOT, we take great pride in creating a customized, streamlined retirement plan for sponsors. If you’d like to see if your company and participants could benefit from a retirement income solution, we would love to hear from you. Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to get started today.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.