Finance

By Mark Olsen, Managing Director at PlanPILOT

To function as a successful plan sponsor, you need a retirement plan committee that helps your company organize and administer employee plans, such as the 401(k) or 403(b). While ERISA does not require the committee itself, committee members can keep your organization in compliance with all established regulations. To help you get the most out of your retirement plan committee, we’ve compiled several strategies for your consideration. Could implementing any or all of the following enhance your retirement plan committee’s performance?

Commit to Education

One of the challenges of maintaining a successful retirement plan committee is that there are no formal job titles or descriptions. And yet it is vital that committee members have the qualifications necessary to administer and manage employee retirement plans.

For example, committee members should be properly trained to understand their role as fiduciaries. This means acting in the best interests of retirement plan participants and their beneficiaries—and not the plan sponsor. Offering both preliminary and ongoing training can reinforce this distinction in the minds of committee members for a more effective team.

Similarly, it’s important for committee members to stay informed about evolving regulatory issues, such as changes to ERISA, DOL, or IRS requirements. Quarterly training sessions can keep your team apprised of any changes and can also create a layer of accountability to maintain fiduciary responsibility. With the passage of SECURE 2.0, there are a number of important items to discuss for potential plan adoption.

Delegate Tasks Appropriately

One of the most important benefits of a retirement plan committee is the ability to delegate tasks to committee members. For instance, you could divide your committee into segments, each one handling such roles as fiduciary oversight, administrative processes, employee communications, and settlor functions.

Delegating these tasks can also help fine-tune your education and training initiatives. Some committee members will benefit from specialized legal and regulatory training, while others may be better served by learning more about plan options.

Dividing your committee’s responsibilities may also assist in bringing on new committee members. Those with more experience in their committee assignment can serve as valuable mentors for new members and can demonstrate the best practices of retirement plan management. Providing some historical context for prior plan decisions is an invaluable benefit to new committee members.

Reflect Your Company’s Diverse Demographics

Sixty percent of American organizations have some type of diversity, equity, and inclusion (DEI) program in place. But does your retirement plan committee reflect this commitment to diversity and inclusion?

Historically, access to retirement plans for people of color has lagged behind that of their white peers. Your committee can be a part of your pursuit of inclusion and an accurate reflection of the makeup of your workplace. That starts by populating your committee with representatives from every age group, ethnicity, gender, and socioeconomic background. These representatives can provide guidance on how best to serve the needs and concerns of all groups under your employ—and the benefit is that this guidance comes from your committee’s own lived experience.

Documentation and Transparency

Given your committee’s fiduciary responsibilities, it’s important to document your decisions and activities. Consider appointing a secretary to record agenda items for each meeting, then record the minutes of each meeting and any action items that rose to the surface.

This is especially true when your committee implements changes to your company’s retirement plan. These changes, as well as any salient discussion points that led to those proposed changes, should be carefully and clearly documented. 

Does your retirement plan committee operate under a committee charter? While it’s not legally required, a written charter can help you stay organized and delegate who has fiduciary responsibility. A charter can also contribute to your legal defense in the event of a lawsuit.

Comprehensive Retirement Plan Consulting 

Need a little more guidance? PlanPILOT is here to help! We offer a comprehensive approach to retirement plan consulting, and our consulting services can also keep your company up to date on the latest trends. The right advisors in your corner can help your organization deliver retirement benefits that serve the needs of participants while mitigating risk to your company. It’s a win-win! 

To get in touch, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com. We look forward to hearing from you!

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

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.

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.

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.

By Mark Olsen, Managing Director at PlanPILOT

Just when retirement plan sponsors were getting used to the SECURE Act that went into effect in 2020, new legislation was passed in 2022 designating new rules in the SECURE Act 2.0. Some of those changes went into effect immediately and other changes are set to start as far out as January 2024. This means it’s crucial for employers and plan sponsors to familiarize themselves with these upcoming modifications and prepare for their implementation. By staying informed and proactive, plan sponsors can assist in a smooth transition to the new rules, maximizing benefits for employees and maintaining compliance with regulatory requirements. Here’s how to plan ahead for all the upcoming changes. 

Understand Recordkeeping Readiness

As the new provisions come into effect, it’s essential to assess your organization’s current recordkeeping provider. Start by requesting insight from your recordkeeper on their capability plans to handle the new provisions, including:

1. Allowing employees to designate employer contributions as Roth contributions, which will impact employee taxes and require considerations for vesting. (optional provision)
2. Permitting qualified student loan payments to receive employer matching contributions, which will have budget implications for plan sponsors. (optional provision)
3. Establishing an emergency savings plan for non-highly compensated employees linked to the defined contribution plan, potentially with a 3% auto-enrollment feature, subject to specific account balance and investment limitations. (optional provision)
4. Ensuring catch-up contributions for employees with compensation over $145,000 (indexed for future years) are contributed on a Roth basis, and allowing all participants to make catch-up contributions on a Roth basis. (mandatory provision)
5. Increasing the catch-up contribution limit for individuals aged 60-63 to the greater of $10,000 or 150% of the regular catch-up contribution amount ($11,250 for 2023), indexed for cost-of-living increases. (optional provision)

The next step is to determine which of these optional provisions are aligned with your outlook on the employee benefit plan. An additional consideration is “packaging” a number of these changes versus rolling them out on an individual basis.

And that’s just some of the changes to come! Needless to say, there will have to be a lot of modifications to your recordkeeping process. Which of these changes will be easier to make, and which might present a challenge? Establish an open line of communication with your recordkeeper to make a smooth transition and minimize potential disruptions to your internal staff that are supporting these changes.

Lastly, you can keep tabs on all the changes in our SECURE 2.0 Plan Sponsor Checklist.

Plan for Multi-Stage Employee Communication

In making this transition to the new SECURE 2.0 provisions, it’s a good idea to plan your employee communication carefully. Since a number of changes are coming up, a multi-stage communication strategy can help create awareness and understanding among employees. 

Begin by announcing the upcoming changes and providing a brief overview of how they affect your employees. This initial communication should be clear, concise, and informative, giving employees a basic understanding of what to expect. 

Next, dive deeper into the specific provisions that are most discussed and asked about, especially on topics that impact employees’ retirement planning. Offer detailed explanations and resources to help employees understand the changes and how they can benefit from them. This stage is critical to keeping employees well informed and feeling confident in their retirement planning decisions. 

Finally, host Q&A sessions and provide additional resources to address any lingering questions or concerns. These sessions can be conducted as webinars or in-person meetings, allowing employees to ask questions and clarify any confusion. Provide written materials and online resources for employees to reference as needed. The good news is your plan recordkeeper will likely be in a position to assist you with some or all of these additional communication resources.

Review Impacts to the Employer’s Budget

Implementing the SECURE 2.0 Act provisions will likely have financial implications for your organization. Begin by assessing the costs associated with implementing the new provisions, such as technology upgrades or additional administrative tasks. At the same time, estimate potential savings from voluntary provisions like the tax credit for small businesses that adopt automatic enrollment. 

Adjust your organization’s budget to accommodate these changes. Allocate resources for necessary updates and adjustments, and balance the budget to maintain financial stability. Be prepared to reallocate funds as needed to help implement a smooth implementation of the SECURE 2.0 Act provisions. 

Is Your Plan Ready for SECURE 2.0?

The list of rules and regulations businesses need to follow in both the SECURE Act as well as the SECURE Act 2.0 can be daunting and overwhelming. If you’d like help preparing for these changes and more, we’d welcome the opportunity to assist you. At PlanPILOT, we have been navigating legal and regulatory changes as qualified plan consultants for over 20 years. If you’re ready to take the next step with your employer-sponsored retirement plan, 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.