The corporate sponsors of 401(k)s and other defined-contribution (DC) benefit plans are likely to be more active in reviewing plan goals, more prescriptive in their investment options, and more prone to interact with employees who want to understand how to hit their own retirement income, according to consultants at Mercer, a big employee-benefits and actuarial-advice firm.
With Congress and President Obama considering cuts in “entitlement programs” that affect current and future retirees, such as Social Security and Medicare, employees and retirees are likely to a closer look at the DC plans they participate in. And employers should, too, the consultants believe. “It’s no longer a situation where DC-plan sponsors can simply ‘set it and forget it,’” says Amy Reynolds, Mercer’s DC leader in the United States. “The trend is for plan sponsors to regularly evaluate whether their DC plans are successful for both the organization and its employees.”
To be sure, Reynolds and the firm stand to profit from the evaluations their clients and potential clients choose to make. Nevertheless, an ounce of prevention can be worth a pound of cure — especially when one considers the big bucks invested in DC plans, the employee-relations issues involved, and the possible liabilities if a sponsor bungles the way it communicates to plan participants. In that, Mercer proposes 10 steps DC-plan sponsors should take in 2013:
1. Define success. A successful DC plan hinges on four factors: increasing participation, increasing the savings amount, investing appropriately, and spending wisely. Employers can improve their plans through skillful, intentional intervention based on the plan’s demographics and employee behavior. Costs should be minimized where appropriate to increase the “value” of each factor.
2. Recalibrate your default option. Review how appropriate your plan’s default option is for your unique participant population. If you offer target-risk funds, consider the effect of switching to target-date funds. If you offer off-the-shelf target-date funds, reevaluate the asset allocation or consider offering customized target-date funds based on your plan’s demographics.
3. White-label your investment options to drive participant behavior. Many employees build their DC-investment portfolios based on an investment option’s name recognition rather than focusing on asset allocation. Consider “white-labeling” your investment options by offering them in an unbranded and customized way that’s best designed for the plan. A custom approach allows you to offer fewer investment options by building a well-diversified portfolio that otherwise may be difficult to offer on a stand-alone basis. You also have the flexibility to add or replace managers without the communication and administrative headaches with a branded option.
4. Get the best bang out of your communications buck. Assess the right content and delivery. Many plan sponsors offer a tiered investment structure to help participants make better investment-allocation decisions. Make sure the investment options are communicated by tier in the participant-education materials and on the plan’s website.
5. Help participants understand their retirement income. Employees can find it tough to relate to large lump-sum amounts in the distant future. Tell them how much monthly income, in today’s dollars, they can expect in retirement given their current balance, contribution rate, and years to expected retirement.
6. Don’t leave participants’ retirements at risk. Handing retirees a lump-sum check and wishing them “good luck” doesn’t cut it. While we’d all like more developed retirement-income tools and more regulatory guidance, we can’t put our near-retirement employees on hold indefinitely. It’s time to start crafting real solutions for the challenge of educating employees about how to prudently spend down their savings.
7. Complete a compliance audit. With so much governance focus on fees, many plans have gone for years without a compliance audit. With both the Internal Revenue Service and Department of Labor increasing their focus on compliance, now is a good time to remedy that. Best practice includes checking all documentation and communications, as well as administration and transactions.
8. Understand your fiduciary responsibilities. While it may be convenient to let your vendor “take charge” of your plan, never forget that when the DoL, IRS, or plan litigator comes knocking, it will be at your door, not your record keeper’s. You need to take control of your plan and ensure that decisions are made from an unbiased point of view.
9. Focus on fees. New fee-disclosure regulations have led to increased scrutiny of all plan fees. Review and benchmark investment and record-keeping fees separately, think hard about the fee-allocation methodology, and document your review process to support a strong governance framework and help defend against excess-fee lawsuits. Evaluate moving from mutual funds to collective trusts and/or separately managed accounts in order to cut investment fees.
10. Assess a discretionary relationship with an adviser. Appointing an adviser to provide discretionary delegated solutions for a plan in its entirety, or for select investment options within a plan, transfers more fiduciary responsibility to the adviser and may result in time savings for management. Again, Mercer, as a consulting firm, can benefit from this piece of advice, so consider the source when you think about implementing a discretionary relationship, as you would with any adviser.