In a new white paper, Willis Towers Watson (WTW) outlines nine steps advisers can guide their plan sponsor clients through to mitigate risks in defined contribution (DC) plans.
The first risk, according to WTW, is “workforce risk.” The company’s 2017 Global Benefits Attitudes Survey found that half of those age 50 and older plan to work past the typical retirement age. “Employees who want to retire but are not financially prepared can create the risk of a disengaged workforce and contribute to blocked career paths.”
WTW says advisers can help sponsors identify those participants who are not on track for a successful retirement at the traditional age and develop a more effective plan strategy that fosters retirement readiness.
The second major risk DC plans continue to face is “litigation risk,” WTW says. Lawsuits continue to be filed against plan fiduciaries specifically in the areas of investment offerings, plan-related participant fees and company stock.
WTW says advisers should help sponsors ensure that their fiduciary committees have the appropriate people sitting on them and that the committees are structured properly. Advisers should ensure that the committee is updating and following internal governance policies for evaluating investment lineups, reviewing fees and executing best practices to document their decisions. According to the firm, strong governance also relies on outside experts such as ERISA [Employee Retirement Income Security Act] attorneys and consultants for guidance on evolving regulations in an effort to minimize litigation risk.
Third, advisers can help sponsor clients minimize “talent risk.” This means, WTW says, that advisers need to ensure that their clients’ DC plans are competitive enough to attract and retain key talent. The solution here, according to WTW, starts with regularly conducted benchmarks and an eye to the evolving needs of a company’s workforce. Willis Towers Watson research shows that key areas of focus among employers who have recently made benefit changes include improving personalized communication, enhancing technology to administer benefits and promoting employee wellness.
Next up is “distraction risk.” WTW notes that most committee members can spend only 5% of their time on plan management issues, which the firm says is “not enough time for even the most basic review of a DC plan, its operations and its results.” Since making investment decisions about a plan’s lineup is so critical, WTW says sponsors should either delegate these decisions to a specialized internal subcommittee or hire an outsourced chief investment officer (OCIO).
The fifth risk advisers should help their sponsor clients mitigate is “compliance risk.” Many sponsors rely on several outsourced experts to assist them with plan documents, administration, recordkeeping and more—making it difficult for the sponsor to have a bird’s eye view of how their plan is running. WTW says the solution is for plan sponsors to hire seasoned experts to conduct periodic compliance reviews. “Both one-time and ongoing reviews are key drivers of long-term success and can save sponsors from IRS and Department of Labor penalties, unnecessary vendor expenses and negative publicity.”
The sixth area WTW calls out is “investment risk.” Many participants, left to their own devices, are challenged to select a diversified portfolio or a target-date fund. “This risk is particularly concerning when you consider how many workers today lack even a basic level of financial literacy,” WTW says. The solution is for plan sponsors to reevaluate automatic enrollment and qualified default investment alternatives (QDIA), perhaps selecting a custom target-date fund (TDF), according to the firm.
Advisers are, of course, very familiar with “savings risk,” whereby so many workers are unsure of how much to save—and many are not saving enough.
WTW says advisers can advocate for automatic enrollment, re-enrollment and auto-escalation. Although the paper does not mention the benefits of increasing the initial deferral rate, the cap on escalation and the company match, these are all obvious considerations advisers should bring to their sponsor clients’ attention. WTW also says that financial wellness programs and support for employees with paying down student debt are other considerations to be had.
“Committees should consider adopting default options into Roth structures or promoting the use of HSAs to cover medical expenses or provide income during retirement,” WTW suggests.
Finally, WTW points to “longevity risk,” the possibility of participants outliving their savings. Sponsors should consider offering annuities, explaining retirement income strategies and/or education about how to maximize Social Security benefits.