The firm suggests ten steps DC plan sponsors should take in 2013:
Define success: Optimize each step leading to “better” retirement outcomes and spend-down strategies—A successful DC plan hinges on four factors: increasing participation, increasing the savings amount, investing appropriately and spending wisely. Employers can optimize 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.
“In general, what we’ve seen is that DC decisionmaking has focused on what competitors are doing. Plan sponsors have been creating competitive programs without thinking about ultimate objections. We are suggesting sponsors take a step back and recognize how different plan elements played together can help participants move in the right direction,” Amy Reynolds, a partner in Mercer’s Retirement business and U.S. Defined Contribution Leader, explained to PLANADVISER. “When talking about costs, we suggest plan sponsors try to manage costs borne by participants so participants have the opportunity to maximize long-term results.”
Recalibrate your default option: Enrollment, deferral escalation and investments—Reevaluate the level of auto-enrollment, auto-escalation and re-enrollment in driving participant behavior, with the goal of accumulating sufficient retirement assets. The default investment option should provide a professionally managed, well-diversified, single-option solution for participants who cannot or do not want to make asset allocation and rebalancing decisions on their own. Review the appropriateness of your default option for your unique participant population. If you offer target-risk funds, consider switching to target-date funds (TDFs). If you offer off-the-shelf target-date funds, re-evaluate the asset-allocation glide path construction or consider offering customized target-date funds based on your plan demographics.
White label your investment options: Drive participant behavior—Many participants build their portfolio based on an investment option’s name recognition (manager selection) rather than focusing on asset allocation. Consider “white labeling” your investment options—unbranded and custom—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 standalone basis. You also have the flexibility to add or replace managers without the communication and administrative headaches of a branded option.
“Plan sponsors should try to move participants away from allegiance to specific fund managers and more to [the] types of funds in which they invest,” Reynolds said. “Participants’ decisions should be driven by what each fund will accomplish from an investment perspective.”
Maximize the impact of your communications strategy: 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/enrollment materials and on the plan’s website/online tools.
Reynolds explained that the tier structure Mercer is referring to is what the firm advocates for plan sponsors to choose investment options that address each type of investor: one focused on the investor who wants decisionmaking handled for them, i.e. target-date funds; a second focused on participants that want investments to mirror the market; and a third for active investors. “Some plan sponsors just list investment vehicles without categorizing them for participants,” according to Reynolds. “The same structure, applied to committee work, should lead to the way the plan is presented to participants.”
In addition, Reynolds suggested DC plan sponsors engage participants more in their plan decisions. She noted that participant fee disclosure was a nonevent, and there was not much feedback from participants, but plan sponsors need to educate participants about how such information can help them make selections for the best retirement savings strategy.
Help participants understand their retirement income: Anticipate the impact of adding projections to participant statements—Participants cannot 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. Educate participants about how actions they take now may impact that outcome.
Develop a spend-down strategy: Don’t leave participants' retirements at risk—Handing retirees a lump-sum check and wishing them “good luck” does not cut it. While we would all like more developed retirement income tools and additional regulatory guidance, we cannot put our near-retirement employees on hold indefinitely. It’s time to start crafting real solutions for the spend-down challenge.
Even offering a lump-sum distribution option in a DC plan is providing participants with a spend-down strategy—take it all or leave it in to accumulate earnings, Reynolds stated. “We think it’s time for plan sponsors to think more strategically about that,” she said. “Plan sponsors should help participants think about all of their retirement income, including defined benefit (DB) plans and Social Security. Offer installment options, an option to purchase annuity or an annuity option in the DC plan. It all comes down to deciding the plan sponsor’s comfort level from a fiduciary perspective and the level of educational support it can provide to participants.”
Complete a compliance audit: The IRS is knocking—With so much governance focus on fees, many plans have gone for years without a compliance audit. With both the Internal Revenue Service (IRS) and Department of Labor (DOL) 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.
“Plan sponsors should not only look at their own processes, but that of third-party administrators [TPAs] and recordkeepers,” Reynolds suggested. “They should revisit how the plan is being administered to comply with plan provisions as well as regulations.”
Understand fiduciary responsibilities: Know the limitations of your recordkeeper’s role and the responsibilities you retain—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 recordkeeper’s. You need to take control of your plan and ensure that decisions are made from an unbiased point of view.
Focus on fees: Investments, recordkeeping and much more—New fee disclosure regulations—408(b)(2) and 404(a)—have led to increased scrutiny of all plan fees. Review and benchmark investment and recordkeeping fees separately, rationalize the fee allocation methodology and document your review process to support a strong governance framework and help defend against excess-fee litigation. Evaluate moving from mutual funds to collective trusts and/or separately managed accounts in order to reduce investment fees.
Assess a discretionary relationship: It's not all or nothing—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 as well as the potential for increased diversification, improved performance and decreased costs. Determining which governance structure is right for you is a critical component of the DC plan management process.
“We are starting to see plan sponsors engage advisers more in decisionmaking and discretionary roles,” Reynolds said. “For example, if the committee doesn’t have the expertise and/or time to monitor investments and make changes as appropriate, it can engage the adviser to do so.”
As defined contribution plans move from supplemental retirement savings vehicles to primary vehicles, plan sponsors are taking a more active management role with their plans, according to Reynolds.
“It’s no longer a situation where DC plan sponsors can simply ‘set it and forget it,’ ” she stated. “The trend is for plan sponsors to regularly evaluate whether their DC plans are successful for both the organization and its employees. As a result, plan sponsors are more active in reviewing plan objectives, more prescriptive when it comes to investment options and more invested in communicating with employees who want to understand how to achieve their own retirement income goals.”