Client Service July 25, 2017

DCIIA Calls for More Robust Use of Automatic Features

The organization has issued a report analyzing what is working in DC plans and how the existing tools can be leveraged further.
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In a new report, “Design Matters,” the Defined Contribution Institutional Investment Association (DCIIA) analyzes what is working in defined contribution (DC) plans and if additional legislation could strengthen them further. DCIIA concludes that plans have the tools they need to get workers prepared for retirement—they just need to use them more vigorously.

The Pension Protection Act (PPA) of 2006 was a watershed moment for DC plans, and has helped change them dramatically, DCIIA says. Before PPA, 19% of DC plans had automatic enrollment, and today that is 60%. Previously, 9% of plans had automatic escalation, and today that is 80%. Stable value and money market funds were the most common qualified default investment alternative (QDIA), and today 85.5% of plans use target-date funds for the QDIA.

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“The difference between retirement savings for workers in plans with automatic features and those whose plans do not have auto features is dramatic,” DCIIA says. “The DC system is already equipped with many of the tools it needs to drive improved retirement outcomes. Wider and more consistent adoption of these tools, including automatic features and adequate initial savings rates, could make a significant difference for today’s workers.”

DCIIA estimates that in plans without automatic features, a person retiring at age 66 would have five times their final salary in savings, whereas a person in a plan with automatic features would retire with 6.66 times their final salary in savings—more than a 30% difference.

DCIIA says that the median initial deferral rate for DC plans is an inadequate 3% and that there is a need for more “robust defaults.” The organization says that existing legislation is sufficient to support higher deferral rates and escalation up to 15%. DCIIA estimates that when plans use an initial deferral rate of 6% and automatic escalation up to a 10% cap, participants could retire with 7.9 times final salary. If it is increased up to a 15% cap, participants could retire with eight times their final salary.

DCIIA also says it is very important for plans to limit loans, hardship withdrawals and cash-outs, as this could increase participants’ holdings by as much as 10%. Today, 86.6% of plans permit participants to take out a loan against their DC plan, with 45.6% of plans allowing more than one loan at a time—and many participants default on the loans upon job termination. Nearly 90%, 87.4%, of plans also allow hardship withdrawals. DCIIA estimates that when a plan optimizes auto enrollment with no leakage, a participant could retire with 8.54 times their final salary.

DCIIA recommends that plans set up a payroll deduction program to help workers set up emergency savings and that they work with their service providers to make it easier for workers to roll their money out of and into their plans. DCIIA also believes it would be useful for service providers to educate participants about the damages DC loans can have on their retirement savings, that they reduce the number of permissible loans to one and that they permit outstanding loans to be repaid even after job termination.

Furthermore, DCIIA supports financial wellness programs that encompass non-retirement issues, as they can help reduce stress at work and increase productivity. DCIIA concludes by saying it hopes that the argument it makes for more robust use of auto features and financial wellness programs will motivate retirement plan advisers and sponsors to embrace them.

DCIIA’s full report, “Design Matters: The Influence of DC Plan Design on Retirement Outcomes,” can be downloaded here.

Client Service July 25, 2017

Advisers Can Help Plan Sponsors Save on Fees

Some advisers say retirement plan fees can be reduced by as much as 50%.
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Advisers have the ability to reduce a retirement plan’s fees by as much as 50%, says Julie Ward, vice president, consulting at NFP’s retirement division in Aliso Viejo, California.

Nathan Boxx, a financial adviser at Fort Pitt Capital Group in Pittsburgh, Pennsylvania, agrees, but thinks there is the potential for even greater reductions: “In my experience, particularly for plans that have not been looked at for a number of years, you can take overall expenses from 4% all the way down to 1% to 2%, making this a significant savings because these plans were not properly managed or given good advice from their previous adviser. However, even making a one basis point savings over a 20-year period can be the difference between a participant retiring at age 65 or 70.”

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Ward explains, “A savings of 1bps on any portion of the plan fees is calculated based on the size of the plan based on assets. For example a 1bps (.01%) fee reduction on a $1,000,000 plan would be $100. A 1bps fee savings on a $100,000,000 plan would be $10,000.  It is relative to the plan size in terms of the savings in dollars. The larger the plan, the greater the dollar amount and impact.”

Mike Zovistoski, managing director at UHY Advisors NY, Inc., in Albany, New York, further explains that if a plan has $1 million in assets, a 1 basis point (1bps) reduction is $100, and if there are 20 participants in the plan, on average, each participant would save $5 a year.

Ward says it is important to look at both the percentage savings and dollar amount savings in context with the plan size, demographics and service needs.

There are four main areas advisers should pay attention to with regards to a retirement plan’s fees, says Zovistoski: investment, recordkeeping, third-party administration (TPA) and adviser.

Right now, sponsors are very aware of the need to find the lowest share class option for the mutual funds on their platform, Zovistoski says. “Once you have a fund lineup with the lowest share class possible for the size of the plan, in terms of assets, as the plan continues to grow in size, even lower share class funds may become available,” he says. While a plan may not review its recordkeeping fees until three or four years have passed, it probably should review its investment share class prices annually, Ward says.

NEXT: Service provider fees

The recordkeeping fees concern the cost of delivering information to participants—through quarterly statements, call centers and websites, Zovistoski says. Just like with the investment fees, “as the plan grows, those fees can be renegotiated,” he says. “It makes sense for the adviser to keep in contact with the recordkeeper to find out if they have developed a new platform with lower fees” as well as to issue a request for information (RFI) or request for proposal (RFP) to find out what the recordkeeper’s competitors have to offer, he says.

Work with the TPA should be reviewed at least every three years, since the Department of Labor (DOL) inevitably comes out with new regulations with that frequency, Zovistoski says. If there are changes that need to be made to the plan document, it is best to make them all at once, because the TPA charges each time the document is amended, he says. If there are options that the sponsor may want to consider in the future, such as making the plan a safe harbor plan, it is wise to put those options into the document so that there isn’t an additional charge down the line, he says.

Finally, the adviser fee is generally in the 25 basis point to 75 basis point range, he says. Many advisers set their fee low, knowing that the plan assets will grow over time. But after a number of years, it is the adviser’s responsibility to review his or her fee to ensure that it is fair, which might result in a 10- to 15-basis point reduction, he says. On the other hand, as the DOL imposes more and more regulations on retirement plans, the risk to the adviser increases, he says. “You have to look long and hard at what your fees should be,” he says. “Look at each individual case.”

Boxx adds: “Keeping an eye on all of these fees is very important. There are several different layers.” However, it is also important to keep in mind the services being rendered for the price being paid, Ward notes.

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