‘The Talk’

The first quarter of a new year offers an opportunity for a fresh start and a new outlook.  In the context of providing services to a retirement plan, it’s a chance to naturally reframe the retirement plan conversation with plan decision makers. Rather than having another “fiduciary responsibility and liability” talk, it may be worthwhile to frame the fiduciary conversation in the context of stewardship and leadership.

Plan sponsors are entrusted with the task of managing retirement plans in the best interest of participants, i.e., to be plan stewards. At the same time, they are in a unique position to impact participant retirement outcomes by enabling savings behaviors and implementing tools that can really effect change, something that leaders do. Being a steward and a leader is more relatable than an academic notion of a fiduciary. Each one of us can think of at least one person who was a good leader, a good steward. We’ve jotted down a few ideas and resources to help you implement them:

Stewardship – Paying attention to these areas will help plan decision makers run the plan in line with what the Department of Labor (DOL) and the Internal Revenue Service (IRS) like to see.

  • Tune up the lineup (and review the investment policy statement [IPS]):
    • Set up a recurring meeting to review investment lineup.
    • Evaluate the number of investments: According to industry experts, it may be best to include 10-12 core fund options with additional access to managed portfolios, such as lifestyle or target funds. Adding more options often inhibits participant engagement.
    • Check how plan options stack up when compared to their benchmarks. This process also may be a good opportunity to evaluate the benefits of using a third-party 3(21) advisor or 3(38) investment manager to offer plan investment monitoring services.
    • If there is an investment policy statement, review it to confirm its consistency with the process used for selection and monitoring of funds; update as necessary. Best practices suggest updates at least every five years. If no IPS is used, consider its merits: The DOL has long held that maintaining and following an IPS is coincident with the duty of prudence because it outlines a “procedurally prudent”
  • Take stock of plan services and fees: Plan sponsors are asked to make sure that the fees paid by the plan are reasonable.
    • Identify all parties that provide services to the plan (e.g., investment platform, third-party administrator, 3(21) or 3(38) service provider, auditor).
    • Confirm that the client has current plan-level fee disclosure documents 408(b)(2) for each of the providers.
    • Review contracts at least every three years to check that the fees are reasonable based on plan type, size and service needs (have they changed?) and are comparable to fees paid by similar plans for similar services.
    • For participant-directed accounts, confirm that participant-level fee disclosures, 404(a)(5), were timely distributed and there is an annual process to ensure recurring notification.
  • Review the process: The IRS underscores the key role solid internal controls play in retirement plan compliance.
    • Lately, the IRS increased its emphasis on importance of consistent procedures when maintaining a compliant retirement plan.
    • Lack of internal controls, according to the IRS, correlates to high incidences of plan errors and is a red flag for an agent conducting a plan audit. Frequently, responses to questions about internal controls determine the scope of plan audit (typically the IRS probes a handful issues spanning one to two years, but may expand its inquiry if there are signs of possible non-compliance).
    • Check for procedures for employee data collection, enrollment, salary deferral and loan repayment deposit-timing, loan procedures, payout to retired and terminated participants, participant notices, as well as document update and retention practices. The IRS published plan-specific checklists which highlight the most common traps, and how to identify and fix them.

Leadership – Plan decision makers are in a unique position to help improve plan success metrics, from savings rates to investment outcomes. Multiple surveys indicate that employees want and welcome this type of intervention; furthermore, participants who use such help fare better than their counterparts (Financial Engines/AON Hewitt Survey, 2014).

  • Fine-tune plan design:
    • If the number one factor in determining how much you’ll have at retirement is the amount you save, closely followed by a well-thought-out asset allocation, we have to pay close attention to two plan features: automatic enrollment and automatic According to a recent national survey conducted by J.P. Morgan, 75 percent of participants favor automatic enrollment and 82 percent want the ability to automatically increase contributions on a regular basis. Moreover, 96 percent are satisfied with the automatic enrollment experience and 97 percent are positive about automatic escalation.
    • Review how employer contributions are allocated, specifically matching contributions. Does it motivate employees to save? Will it help anchor a higher deferral percentage? You don’t necessarily have to increase the match budget; for instance, instead of dollar for dollar up to three percent of compensation, you can redesign the match to 50 percent up to 6 percent of compensation or even 25 percent up to 12 percent of pay.
    • These design principles create success in plans of all sizes, large and small. Moreover, they can position the plan sponsor to better address the top-heavy dilemmas, 401(k) deferral and match test failures, provide a boost to employee morale, and address other hidden costs (financial stress and its impact on productivity, delayed retirement’s relation to increase in health care expenses, etc.).
    • Annual plan review creates an opportunity to once again revisit these features and map out a plan for their implementation.
  • Reboot plan’s education program:
    • Saving for retirement is not getting easier. This is no surprise as financial matters account for the biggest source of stress among Americans According to Prudential Investment’s 2016 Retirement Preparedness Survey, pre-retirees want advice on specific key aspects of retirement planning, including debt management, developing a retirement income strategy, planning for healthcare expenses and creating a monthly income from savings. Yet, only 44 percent use a financial advisor. A financial wellness program may be the first important step to improve engagement and financial choices.
    • Map out a participant wellness program that speaks to the needs of different participant population groups: new plan participants, employees not engaged in the plan, women and pre-retirees. Recent SSGA research suggests that there is a strong connection between financial wellness and employees’ happiness in the workplace, and investment into a well-coordinated program may improve not only plan outcomes but also contribute to greater employee engagement.
    • Many record keepers have predesigned campaigns (brochures, workshops, paycheck stuffers and online tools) that are geared to the different needs of participant groups and their communication preferences. Retirement Plan Solutions can point you in the right direction to access the available resources and design a successful communication/education campaign.

Tax laws are complex and subject to change. This material is provided for information purposes only. Individuals are urged to consult a properly licensed tax or legal advisor to understand the tax and related consequences of any actions they may choose to undertake as relates to their retirement accounts and investments.