Finance

By Mark Olsen, Managing Director at PlanPILOT

Retirement for the American worker is a popular topic today, not only in the financial media, but also in the halls of Congress, where new legislation is continually considered to offer more retirement options, especially in employer-sponsored plans. The Pension Protection Act of 2006 and the SECURE 2.0 Act of 2022 are examples of bills that made significant changes and allowed for new features to be offered in retirement plans.

Bull’s-Eye on the Retirement Year

One of these changes is the increased inclusion of so-called “target-date funds” (TDFs). These investments have become a popular fund selection in employer plans since their introduction after 2006. As an example, Vanguard Funds reported that TDFs grew in their plans as the default choice for new-entry participants from 71% in 2013 to 90% in 2022. 

As about 20% of retired workers leave their accounts within their former employer’s plan, there has been a growing need to address the investment preferences and objectives of retired workers who do leave their money with the employer plan. Given the growth of deferrals flowing into TDFs and many participants continuing to leave their money in the 403(b) plan, some non-profit employers are selecting customized target-date solutions to accommodate the needs and objectives of these former employees.

Understanding Target-Date Funds

Target-date funds are specialized asset-allocation investments designed to relieve the investor of having to decide the asset allocation percentages between equities (stocks), fixed income (bonds), and cash/money market funds. As the investor approaches their intended retirement age, these allocations become automatically more conservative on the premise the investor becomes less risk tolerant. 

Depending upon the desired “target year” selected, the fund is structured and managed to “rebalance” the asset allocation based on the shrinking time horizon, so by the intended retirement age, the fund’s holdings generally reflect a less volatile (less risky), balanced allocation between equities and fixed income/cash. Yet even for the retired employee-participant, this allocation may be appropriate for some, but not others. Some retirees may wish further enhancements or selections to bolster diversification and lower risk.

Enhancing Investment Holdings for Retired Employees

Customization also includes examining the holdings and makeup of the target-date funds themselves. Even though the target-date year (at or near the retirement year of the participant) between two different fund families may be the same, the actual composition of the funds may be significantly different. To address the needs of post-retirement participants, employer plan sponsors are requesting customization of target funds that include non-core investments that may be only available in the particular fund. These include natural resource and other “real” assets, non-core fixed-income assets and other alternatives that may not be prudent to offer all plan participants.

Instead of customization of target-date funds, some plan sponsors have also begun to request more fixed-income investment choices for the plan menu, since most post-retirement participants naturally gravitate toward a greater allocation of less-volatile fixed income holdings as they age and are no longer working. In addition, as the percentage of post-retirement participants in a given 403(b) retirement plan increases, sponsors have recognized the benefits of providing a greater array of fixed income to both current employees and retired former employees.

Providing Secure Protected Lifetime Retirement Income

A significant feature also available today is the ability of the participant to annuitize a portion of their retirement account to create a dependable stream of lifetime income. The SECURE 2.0 Act allowed and encouraged employers to incorporate in-plan annuities as a feature of retirement plans.

Studies cited by Fidelity Investments (by the Employee Benefits Research Institute 2021 survey) indicate that 78% of workers would be interested in such a feature to ensure they don’t outlive their savings. Studies by notable retirement research specialists, such as Professor Wade Pfau, have demonstrated benefits of including a “protected lifetime income” can lower longevity risk and other risks of retirement finances. In a research paper on the benefits of annuities, Dr. Olivia S. Mitchell, Executive Director of the Pension Research Council at the Wharton School of Business, states that “most people would be better off if they had access to deferred income annuities in their …accounts….”

Implementing These Enhancements May Be Complex

Customization is an enticing concept, but usually also requires advanced expertise as to the pros and cons of implementing these features into an employer-sponsored retirement plan. With the increased focus on the plan sponsor’s fiduciary responsibility to participants, employers who lack such expertise are encouraged to utilize the knowledge and experience of retirement plan specialists to help design and implement these enhancements. 

At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

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, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

When Shoeless Joe whispered, “If you build it, he will come…” to Ray Kinsella in the movie Field of Dreams, he was talking about a baseball field, not a retirement plan. Fortunately for Ray, it all worked out well—but not so much for many plan sponsors and their retirement plan participants today. In a 2022 study by LIMRA, a financial services research institute, 60% of retirement plan participants in the study felt that communications about their plan were “ineffective.” This lack of productive communication may lead to lower enrollment, indifference about plan benefits, and perhaps contribute to overall employee apathy, morale, and productivity issues.

Plan sponsors may feel that open enrollment lunch presentations, printed brochures at the HR office, or the occasional email message are sufficient, but how would they know? Are these employees showing up just for the free lunch? Do they scroll past the email amongst the hundred others they receive? How do you know you’re successfully reaching these participants in a way they understand and is meaningful to them about their retirement plan?

Get Started by Understanding Your Audience

Communications are the most effective when plan sponsors “meet employees where they are.” This means understanding different literacy levels and demographics of employees and structuring the mediums to match the comprehension levels of participant sub-groups. For example, how you might communicate with younger employees today (email, interactive video), may be quite different from methods used with senior employees (verbal, PowerPoint presentations, and printed literature). In addition, even participants within a group process information in different ways. Some are better suited to verbal explanations, others by illustration, video demonstrations, or graphic diagrams.

Experienced experts suggest using a multi-channel approach to reach as many participants within a diverse employee base as possible. Simultaneously utilizing webinars, email messages, videos, and live in-person presentations allows all participants the opportunity to engage with the plan representatives or consultants in a medium they understand and normally use in daily life.

Build Trust With Frequent Direct Communications

According to senior communication consultants, ineffective communication can leave employees confused and apprehensive about utilizing retirement plans and other benefits. In fact, behavior economists Richard Thaler & Cass Sunstein, in their book Nudge: The Final Edition (p. 13), suggest that people often make poor choices in a context where they are inexperienced, not well informed, and communication is slow and infrequent. 

The annual enrollment meeting or occasional email isn’t usually enough. Frequent communications, such as a monthly newsletter, may be more productive in allowing employees time to process information, follow up with questions or inquiries, and develop a greater comfort level with the materials and provisions. 

Other recommendations include establishing online focus groups or chat rooms, where participants can ask questions and receive input from other employees as well as discussion moderators. Such methods resemble social media threads or other online methods that employees use frequently. Moderators or plan sponsors can also monitor discussions to detect common and frequent questions; this can indicate areas where a lack of awareness or misunderstandings are prevalent and therefore where further explanation or clarification in plan materials is warranted. 

Measure Effectiveness

Plan sponsors may implement improved modes of communication with the best intentions, but knowing whether these initiatives are productive is crucial to success. As mentioned above, monitoring discussion group threads and encouraging feedback from participants could result in further insights. Monitoring and quantifying the actions participants take in response to communications (and whether appropriate choices were made) could help plan sponsors measure demographic trends, deficiencies in materials or messaging, and whether the information conveyed is fully understood by the employee audience and if the end objective is attained (e.g., emphasizing the benefits of long-term saving and investing in the retirement plan results in greater enrollment and payroll deferrals to the plan afterward).

Implement Modern Communication Techniques

As mentioned, people absorb and process information in different ways. While glossy fact sheets and brochures may still have their place, consider incorporating digital presentations with animation and graphics, interactive tools, and videos, all of which should be accessible via smartphones. Employees may not necessarily have personal computers or tablets, but they most likely have and use their smartphones. 

Consultants state that just like schoolchildren, adults may learn and assimilate information more easily if it’s presented in a fun, creative manner, and using elements found in social media could be useful as well. Other suggestions include using individual “life events” (work anniversaries, birthdays, or promotions) to send targeted messages about benefits that may be appropriate to that occasion.

Use the Team Approach

Oftentimes, plan sponsors or HR departments lack the technical information to properly disclose and explain specific plan features to employees in an understandable manner. Plan sponsors often state they’re the “employer,” not the benefit expert. Partnering with benefit consultants, who can provide the knowledge and skill and can simplify “jargon” into more common language, examples, and bite-sized snippets, may be an efficient means of ensuring the message gets across.

We’re Here to Help

For more information on retirement plan benefits, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to discuss how we can help you implement or improve your retirement plan benefit program.

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, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

What Is Retirement Plan Benchmarking?

Benchmarking is a process where an employer evaluates and measures its plan against others (normally like-kind) to determine strengths and potential shortfalls. Results may indicate where improvements can be made, using defined criteria that may be applied to the comparables in a fair and balanced manner. For retirement plans, these criteria could include plan design and provisions, features and services of the plan provider, investment selection and offerings, and fees and expenses.

Benchmarks are derived from the average of a large sampling of peers. An oft-used term for each criterion is “reasonableness,” or whether the benchmark fits within the range of other comparable plans. For example, “fee reasonableness” is a common watchword among plan sponsors and their advisors to avoid running afoul of ERISA-based sanctions and enforcement from the DOL. Using benchmarks to design and later demonstrate that the plan is adhering to common industry standards is a wise strategy to stay out of trouble and keep your plan functioning properly.

Your Plan May Work, But Is it Really Right for You and Your Employees?

Assuming you’re being a responsible plan sponsor and following the benchmarked criteria, the next question to ask is: Is your plan successful and effective for your employees? As a fiduciary, plan sponsors are required to ensure the plan is working and meets the needs of its participants. Does your plan? It may meet certain benchmarks, but what is the basis for these benchmarks? In other words, the benchmarks may be measurable, but are they meaningful for you and the participants in the plan?

For example, your plan’s “participation rate” (or how many employees participate in the plan) may be 85% against a benchmark of 80%. While your rate exceeds the benchmark, how does it compare with similar organizations in your industry? If others achieve 90% or better, then your plan falls below average and now becomes a shortfall, not a strength. 

Further, is there a reason behind where your standards measure compared to the benchmark?  Are your employees actively seeking self-help financial tools from a provider? Do they have the capacity to participate in the plan, and do they have an active understanding of plan benefits to make sound financial decisions, whether these involve investment selection, deferral rate, or withdrawal requests?

The Benefits of Customization

These questions point to the need for careful plan design and customization. Retirement plan participants often ask their advisors, “How much do I need to save for retirement?” The honest and fiduciary-minded advisor would (or should) state, “It depends.” 

Just as no one car, house, or personal financial plan fits everyone’s needs, a retirement plan should be custom-designed and managed with the individual needs of the plan participants and the plan sponsor company in mind, within the context of the specific industry, the participant demographics, and even the regional aspects of the company and participants. Moreover, knowing the right questions to ask about the benchmark criteria is crucial to maintaining a vibrant and successful retirement plan.

Why a Partner Consultant Could Be Invaluable

Having a team of professionals to assist in the design and management of your plan offers numerous benefits, including the confidence that your plan is functioning smoothly and cost-effectively and meeting the needs of your company and its employees. 

In 2023, just over 100 new ERISA class-action lawsuits were filed. The regulations of ERISA have increased in complexity over the years and the DOL has become more aggressive in their oversight and enforcement. Understanding and managing these complexities takes away valuable time and focus from running your business. This is where a retirement plan advisor can reduce your responsibilities and risk exposure. 

At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

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, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

Managing a retirement plan means the stakes are high for employers tasked with the fiduciary responsibility of overseeing their retirement plans. The complexities of compliance with the Employee Retirement Income Security Act of 1974 (ERISA), coupled with the potential for severe financial repercussions due to administrative oversights, and more recently the multitude of mandatory and voluntary provisions under SECURE 2.0, have led many to consider hiring a 3(16) plan administrator. 

This guide is designed to shed light on the crucial aspects of understanding your fiduciary responsibilities, how a 3(16) plan administrator can help you, as well as mitigate risks. While this choice may not be right for every retirement plan, it could be of tremendous value to those wishing to add support to their plans while mitigating risks and seeking to improve the financial well-being of plan participants.  

Understanding Fiduciary Responsibilities

As a fiduciary, the plan sponsor is entrusted with acting in the best interests of the plan participants and their beneficiaries. This encompasses a range of duties, including verifying that plan fees are reasonable, that the plan’s operations adhere strictly to the terms outlined in its documents, that investments are prudently diversified to minimize the risk of large losses, and that all decisions regarding the plan are made with the participants’ best interests in mind. 

The significance of these responsibilities cannot be overstated, as failing to meet them can lead to poor outcomes for participants as well as legal ramifications for those responsible for the plan. Recent surveys, such as one conducted by Alliance Bernstein in 2019, reveal a concerning decline in fiduciary awareness among plan sponsors, with only 44% of respondents believing they are a fiduciary—when in fact all of them are. This trend underscores the critical need for plan sponsors to fully comprehend and embrace their fiduciary duties.

What Is the Role and Value of a 3(16) Fiduciary?

Tasked with the day-to-day operational responsibilities, a 3(16) fiduciary shoulders the complex burden of ensuring compliance with the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code, and the plan’s own documents. This includes critical tasks such as managing payroll data for accuracy, determining employee eligibility, overseeing plan enrollments and distributions, and ensuring timely and accurate filing of Form 5500. 

By taking on these duties, the 3(16) fiduciary significantly alleviates the administrative load on employers, enabling them to dedicate more time and resources to their core business functions. Beyond mere administrative relief, the value of a 3(16) fiduciary lies in their knowledge, skill, and diligence in navigating the regulatory landscape, which in turn minimizes the risk of costly errors, mistakes, and compliance issues. This protective oversight offers employers comfort, knowing that their plan’s administration adheres to the highest standards of fiduciary responsibility and operational integrity.

Enhancing Plan Efficiency and Participant Satisfaction

By taking over the intricate administrative tasks, a 3(16) administrator works to create a smoother, more streamlined operation—from enrollment to distributions and loans to education. This efficiency not only eases the employer’s burden but also elevates the participant experience, making interactions with their retirement savings more straightforward and less stressful. As participants find the plan more accessible and understandable and gain useful education on topics that many plan sponsors don’t currently offer, their engagement and savings behaviors can improve, which could contribute to their overall financial wellness.

Choosing the Right Services Provider

Choosing the right 3(16) fiduciary services provider is a decision that requires careful consideration, as the provider plays a crucial role in the success and compliance of your retirement plan. When evaluating potential providers, it’s essential to assess their experience, reputation, and the breadth of services they offer. Look for a provider with a proven track record of effectively managing plans similar in size and complexity to your own, and confirm they have robust processes in place for handling the administrative tasks and compliance requirements of retirement plans. 

It’s also important to understand the specific responsibilities the provider will assume and how they will communicate with you about your plan’s status and any issues that arise. Additionally, consider how the provider’s services can integrate with your existing payroll and human resources systems to facilitate a seamless operation. 

Finally, evaluate the cost of their services in relation to the value they provide, keeping in mind that the right 3(16) fiduciary can save your organization significant time and resources, and potentially shield against costly compliance mistakes. Taking the time to select a 3(16) fiduciary services provider that aligns with your company’s needs and values helps maintain the long-term success and health of your retirement plan.

Elevate Your Plan Management: Partner With a 3(16) Fiduciary 

Are you navigating the complexities of managing your retirement plan all alone? If so, it might be worth considering teaming up with a partner to help you elevate your plan and reduce your responsibilities. At PlanPILOT, our company is focused on helping you navigate retirement planning issues so you can potentially achieve better outcomes. 

If you’re ready to consider a 3(16) plan administrator, we’d love to see if we can help. Reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can tailor our services to meet your unique needs.

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.

By Mark Olsen, Managing Director at PlanPILOT

In the multifaceted world of retirement plan management, the role of a consultant is not just to manage investments but also to demystify certain aspects of retirement plans that plan sponsors may or may not think about on their own. Central to this role is the imperative of fee transparency and the efficient management of plan costs. While it may be usual for those of us in the industry to think about these topics, plan sponsors may not consider how fee structures could affect their retirement plans and overall financial outcomes for plan participants. 

This article aims to shed light on the critical aspects of fee transparency so plan sponsors can best help the plan but also relay relevant details to participants. This type of transparency can foster a trust-based relationship between plan sponsors and participants and ultimately benefit both participants and the organization at large. Specifically, we explore actionable strategies for reducing costs, such as embracing technology and automation, effectively managing small account balances, and leveraging recordkeeper technology to enhance participant engagement.

Fee Transparency & Assessing Plan Fees

Understanding and disclosing the fees associated with retirement plans is not just a best practice; it’s a crucial element of fiduciary oversight. This section delves into the importance of accurately assessing and transparently communicating plan fees, laying the groundwork for trust and efficiency in retirement plan administration.

Overview of Relevant Regulations

Regulatory frameworks like the Employee Retirement Income Security Act (ERISA) play a pivotal role in governing retirement plan fee disclosures. ERISA mandates that plan sponsors must act in the best interest of participants and beneficiaries, which includes keeping fees reasonable and transparent. This regulation requires detailed disclosures about the fees and expenses associated with plan investments and administration. These disclosures allow participants to make informed decisions regarding the plan selections and investments.

To confirm your fees are reasonable and transparent, regularly review your plan fees, including the investment management fees and administrative fees. While others might suggest reviewing plan fees less frequently, I believe this should at least be an annual review.

Benefits of Compliance

Adhering to these regulatory requirements offers numerous benefits. For plan sponsors, compliance with fee transparency regulations reinforces their fiduciary duty, safeguarding them from potential legal liabilities. For participants, clear and up-front information about fees empowers them to make more informed investment choices. Additionally, this transparency fosters a trusting relationship between sponsors and participants, enhancing overall satisfaction with the retirement plan. Furthermore, it encourages competitive pricing and efficiency among service providers, ultimately benefiting the plan’s performance and the participants’ retirement savings.

If you aren’t sure you want to conduct these annual reviews (as well as the compliance requirements that come with it), you can also consider hiring an investment manager for the plan, who could then take that responsibility off your shoulders.

Managing and Reducing Costs When Possible

Efficiently managing and reducing costs is vital for both sustaining the plan and optimizing participant benefits. This doesn’t mean plan sponsors should work harder or longer hours for less money. Instead, the point is to streamline plan operations so you can minimize expenses. By focusing on innovative solutions such as technology integration, effective management of account balances, and leveraging recordkeeper platforms, advisors can significantly enhance the cost-effectiveness of retirement plans.

Embracing Technology and Automation

As innovations continue to advance, embracing technology and automation stands out as a way to change how you conduct your operations. By integrating advanced tech solutions, plan sponsors can streamline administrative processes, reducing the need for labor-intensive, manual tasks. This shift not only increases efficiency but also significantly lowers operational costs. Automation in processes like enrollment, contribution management, and reporting enhances accuracy and speed, further reducing the likelihood of costly errors. For advisors, this means being able to offer more competitive fees, while for plan participants, it translates into a more efficient, cost-effective retirement plan experience.

Managing Small Balances

Another effective strategy for cost reduction is the management of small balances in retirement plans, specifically those belonging to former employees. By rolling over or distributing accounts with balances under $7,000, this will increase the average account balance within the plan. This is a critical metric for recordkeepers when establishing fees. Higher average account balances often lead to lower per-participant fees due to economies of scale. Consequently, this strategy not only streamlines the plan but also has the potential to lower the overall fee structure, benefiting both current participants and the plan sponsor.

Leveraging Recordkeeper and Educational Technology

Utilizing the technology offered by recordkeepers can be a strategic move for plan sponsors. These platforms often provide tools and resources aimed at educating and advising plan participants. By using these technologies, plan sponsors can offer enhanced guidance and support without incurring additional costs. This approach empowers participants with knowledge and confidence in managing their retirement funds. Furthermore, educated participants tend to make more informed decisions, leading to potentially better plan performance, reduced costs, lower administrative demands, and less compliance risk.

Optimize Your Retirement Plan: Focus on Cost Efficiency and Transparency Now

Looking for specialized insights to optimize your retirement plan offerings? PlanPILOT can help. Our dedicated team brings a wealth of experience in retirement plan consulting, keeping your company ahead with the latest industry trends and strategies. With PlanPILOT as your partner, you can confidently offer retirement benefits that meet your participants’ needs while safeguarding a plan sponsor’s interests. 

To explore how we can support your retirement plan goals, contact us at (312) 973-4913 or drop an email to 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.