At PlanPILOT, we assist clients in not only achieving their goals and satisfying their fiduciary responsibilities today but in continually looking ahead to ensure a dynamic plan and benefit. The industry and the role of retirement plans are evolving so swiftly that, while plan sponsors don’t need to be cutting edge, they do need to take steps to keep up with the changes. The last thing you want is to wake up one day and realize that your plan is stuck in the past.
Here are 5 actions plan sponsors should take to avoid this scenario:
1. Rethink Your Position on Auto Enrollment
Auto enrollment has now become the norm. It improves retention rates to around 90%, thereby increasing enrollment rates and deferral rates, and reducing exposure to extreme investments.
When the concept of auto enrollment was introduced with the Pension Protection Act in 2006, it was unfathomable to many plan sponsors. But it is no longer considered optional since 401(k)s now serve as a primary retirement vehicle. Early adopters of auto enrollment stepped in gently, with a modest 3% deferral rate and, in most cases, no auto increase rate. Today, the second generation of auto enroll plans provide a 6% deferral rate and auto increasing by 1%-2% per year to a maximum of 12% or 15%.
What does this mean to you? You want your employees to be able to retire, especially since it benefits both of you.
Note: Your unique plan situation and demographics may not make the auto enroll cost worthwhile. We suggest researching plan design options to get optimal results in a more affordable manner.
2. Reevaluate Your Target Date Selection
In 2013, the Department of Labor (DOL) released information to assist plan sponsors regarding the selection and monitoring of target date funds (TDFs). If you completed your selection process before this date, have you incorporated the DOL tips into your selection?
The landscape for target date funds has changed dramatically. In 2006, there were only 7 TDF funds with more than a three-year track record, and today there are more than 40! TDFs are not a homogenous group, and the selection criterion goes well beyond passive and active funds and a to and through retirement glide path. In addition, your selection criteria, such as plan demographics and plan sponsor goals, may have changed since your selection.
More recently, tools have been developed to assist plan sponsors in the selection process. Our proprietary tool at Sheridan Road, the Target Date Fund Fiduciary Road Map, incorporates the DOL tips. It also outlines five practical steps, beginning with a strategic plan review, to assist plan sponsors in their TDF selection and their glide path goal setting. Glide paths can differ dramatically, and it is critical to understand how they can affect your retirement goals. According to Morningstar, 2010 TDFs suffered losses ranging from 9% to 41%! That’s a significant range of returns for funds that are targeting the same retirement year!
3. Take a Fresh Look at Managed Accounts as the Plan QDIA
Under the Pension Protection Act, managed accounts were deemed an acceptable qualified default investment alternative (QDIA), along with target date or lifestyle funds and balanced funds. But even so, managed account adoption at the plan and participant level tends to be low, especially as a plan’s qualified default investment alternative (QDIA).
The quick dismissal of this option at the plan level is mainly due to the additional cost that the participant incurs. But what about the cost to a participant’s outcome from using a non-personalized approach based solely on date of birth? Managed accounts offer a personalized approach with customized recommendations, taking into account a participant’s personal data such as their savings rate, estimated Social Security benefits, marital status, etc.
The results from a study conducted by Morningstar reveal that managed accounts can improve financial outcomes through better savings rates and investment choices. Their study found that savings rates improved by 2.2% of salary on average after a participant received recommendations. Recognizing this, the industry is making strides in the spirit of continuing to improve outcomes. Some advisors are serving as a 3(38) fiduciary on the managed accounts as part of their service delivery, thereby eliminating the extra fee that makes these somewhat less tasteful for plan sponsors.
4. Conduct Consultant Due Diligence
When was the last time you conducted a consultant search? The consultant service delivery model has changed drastically in the last decade. In the past few years, this shift has accelerated as the industry, along with the needs of plan sponsors, has evolved and thrust retirement plans into the regulatory spotlight.
Not all consultants are created equally. What started as an investment-driven business with a consultant included has expanded to incorporate a much more holistic method as well as a variety of plan sponsor and participant services. In addition to a consultant’s confirmed fiduciary status, a good question to use to initiate your research is to ask your consultant what percentage of their revenues come from the retirement plan business. Their answer should tell you how committed they are to the retirement plan space.
5. Are You Considering Fiduciary Outsourcing?
Fiduciary outsourcing has gathered significant traction in the past few years as the complexity in the oversight of plans has intensified. Fiduciary outsourcing can range from hiring a 3(38) solution to a broader outsourced chief investment officer (OCIO) solution. To complicate the hiring process, providers have different interpretations and offer varying levels and structures of fiduciary outsourcing.
The amount of fiduciary liability plan sponsors retain in these solutions is a matter of opinion since it hasn’t yet been tested in court. In any event, it is generally agreed upon that a plan sponsor retains the duty to prudently evaluate and monitor the performance of their fiduciary outsourced provider.
Contact Us
Are these ideas new to you? Is your plan as up-to-date as it should be? Call us today at (312) 973-4911 or email info@planpilot.com and we can answer any questions you have or discuss how we can apply our expertise to your unique situation.
Related Posts
Increase Employee Participation in Your Retirement Plan - Plan sponsors can sometimes struggle to effectively communicate a plan's benefits to employees in ways that boost engagement and enrollment. Don't let your plan wither… ...Read More
The SECURE Act is Now Law - The SECURE Act officially became law in December 2019, marking one of the most comprehensive retirement reform packages employers have seen in years. What should… ...Read More
Maximizing Plan Design to Drive Better Outcomes - Due to the number of options available, plan design can be a complex undertaking. Learn more about the plan design features that will boost your… ...Read More