Before the Enron scandal that resulted in the increased accountability of auditing firms to remain unbiased and independent of their clients, there was relatively little litigation in the retirement plan arena. But this has changed, as was the perception of 64% of attendees polled at the PLANSPONSOR National Conference in Chicago, who indicated that litigation risk is increasing in this industry.
Jamie Fleckner, a partner at Goodwin Procter LLP, said “plaintiff’s lawyers have become more interested in lawsuits because of the increased assets in defined contribution (DC) plans, with the focus of the suits against plan sponsors and providers.”
But lawsuits also arise when problems come up with loans, deferrals and distributions according to Scott Liggett JD, Ddrector, ERISA oversight, at Lawing Financial Inc. Qualified Plan Advisors.
“A lot of times it’s simply issues with day-to-day activities of the plan and a lack of oversight and processes not followed,” Liggett said. “This is above and beyond fee share class issues.”
In order to get processes in place, Fleckner said, a plan sponsor can hire lawyers or independent fiduciaries, but this is not always feasible, especially for small plans.
“Or plan sponsors can get an investment policy statement (IPS) to help manage the plan,” Fleckner said. “But importantly, if you create the document, you must always consider it and not just put it on the shelf.
What does a quality document look like? Liggett said: “You don’t want to paint yourself into a corner. At the end of the day, those who look at plan documents such as an IPS, need to have them be understandable. At the same time, they should not be overgeneralized—not when or what needs to be done, for instance, that does not help.”
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To Peter Kapinos, head of acquisition and retention
marketing at Empower Retirement, the whole point of employer-sponsored
retirement plans has to be helping participants reliably replace their income
in retirement. Speaking at the 10th annual PLANSPONSOR National
Conference, Michael Swann, director of defined contribution (DC) strategies, SEI
Investments, said he looks to results—participants being able to retire
when they want.
In thinking about how to get them there, Rennie Worsfold,
vice president of Financial Engines, noted that many plans target a 10%
savings threshold for participants. However, one in four people fail to take full advantage of their employer’s match, he said, and some studies
suggest a total contribution rate of 15% to 20% is likelier to meet participant
needs.
Understanding that participants probably will not make such large deferrals on their own, what kind of plan design features should sponsors adopt
to do it for them?
The guiding principle should be “simplicity above all,”
Kapinos said.
Swann broke the retirement process down to four steps for
participant success: 1) Contribute early, often, and at a high enough level; 2) invest appropriately; 3) limit leakage from cash-outs and loans; and 4) turn
accumulated savings into an income stream.
All three advocated for periodically increasing
participants’ contributions, and many participants are open to having this
decision made for them, as well. Among participants without
auto-escalation in their plan, Kapinos said, nearly three in four reported
being somewhat to extremely interested in this feature. When an annual
escalation feature would not work for a given population, Worsfold suggests
conducting a one-time increase. This is particularly helpful for at-risk
groups, so consider alternative options for your plan to find what will most
help your participants, he advised.
Once the money is in the plan, there is much debate as to
what savings vehicle is best-suited to maximizing the risk-adjusted returns.
Sponsors should look at their plan demographics for the answer to that
question. For the people who would benefit from a target-date fund (TDF), Swann
said they need to invest 100% in that option; total investors see a 2% annual
benefit over partial investors. For the people who need something else, he said,
it is up to the sponsor to build the best portfolio for them.
There is no silver bullet for all participants, but
building a lineup to accommodate the three common tiers of investors—“do it for
me,” “do it with me,” “do it myself”—can help, Swann said.
And, for all types
of investors, Worsfold added, adviser access is most critical when the stakes
are highest, close to retirement. Segment your population to ensure that you
are delivering the right services to the right people.
NEXT: Making success
the default
The key, Kapinos said, is to make success the default—“What
is the path of our employees?” Start workers on the path to retirement as soon
as possible, and do not neglect mid-career participants. Life can get in the way
of long-term savings goals, and implementing features such as automatic
re-enrollment and escalation can help workers get back on track if their
savings hit a setback.
Sponsors can reduce leakage by adjusting their plan
design, perhaps to allow only one loan outstanding at a time. A related problem is
the treatment of account balances when participants leave a plan. Instead
of taking a withdrawal or keeping separate accounts, Swann said, how do we make the default
for participants switching jobs to transfer their assets between plans? He
gave the example of one client whose newly hired employees were all given a roll-in
form during a one-on-one meeting. When they left the
company, the subject of another meeting was keeping their money in a plan—though, not
necessarily that employer’s—instead of cashing out.
“We, as an industry, do not make it easy [to consolidate
assets],” Worsfold noted, but new models for plan design could simplify
participant moves.
Many providers currently look at catching the roll-in,
Kapinos added, but are less focused on assisting with the rollout.
When it is time for participants to take their money out
of the plan, sponsors should investigate in-plan annuity options and other
draw-down solutions. Until there is a clear regulatory pathway or mandate,
Swann said, adoption of these offerings will be slow.
Worsfold agreed that
sponsors want guidance on annuities, but in the meantime, non-guaranteed
periodic withdrawal products may bridge the gap. These do not require a
fiduciary decision, he said, but can still help participants meet their new
phase of life.
Finally, review your plan’s success metrics, Swann
suggested, reminding the audience, “If you can measure it, you can manage it.”