View Points March 13, 2014

Boost Readiness with Plan Design

Philosopher and poet George Santayana said, “Those who do not remember history are condemned to repeat it” – a statement especially helpful for retirement plan advisers who look to better a client’s qualified retirement plan and participants’ retirement readiness.
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The first quarter of the year, when many advisers conduct year-end plan reviews, is opportune to reflect not only on asset performance but on plan performance. Every 401(k) year-end review must include a comprehensive review of plan data.

These measures can help advisers gauge the health of the plan—and perhaps the satisfaction of the plan sponsor:

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  • The percentage of eligible participants deferring (including a Roth breakout, if applicable);
  • The average deferral percentage of participants;
  • Loan and hardship withdrawal activity;
  • Investment transaction activity;
  • Types of investments where assets are being held; and
  • A comparison of all of the above to previous years.

Armed with this information, advisers are better equipped to offer recommendations on plan design and investment options to increase plan health and, ultimately, participant retirement readiness. Some clients may opt for the status quo, but most will appreciate being offered design choices with a positive approach.

Automatic enrollment and automatic deferral increases are proven methods to boost employee participation and raise deferral percentages. Even a simple provision to opt out rather than into plan participation each year can dramatically increase participation rates. A safe harbor plan design can also help increase plan participation.

This plan design offers a unique trade-off: In return for immediately vesting contributions in full, higher-paid employees can maximize their deferrals and match without subjecting the plan to testing requirements (thus, no funds returned for failed testing).

Needless to say, every employer has a different opinion on these strategies. Some may not embrace any methods to increase participation because of budget constraints on the match. Others who deal with high turnover may be more concerned about preserving unvested employer contributions in the face of increased distributions. 

Some plan sponsors don’t want to be bothered with the employee communications involved in any plan design change of this nature. On the other hand, many employers are open to—even eager for—suggestions to improve the investment efficiency of their plan.

Reducing Loan and Hardship Withdrawal Activity

Some participants may need loans or hardship withdrawals but this privilege can be abused. Employers share some of the pain when employees deplete their retirement savings prematurely without appreciating the long-term impact – or the short-term consequences. Participant education in these cases can make a big difference.

When plans have an increase in loan and hardship transactions, the plan sponsor will undoubtedly appreciate the services of an adviser to educate participants on the long-term impact of withdrawing funds from the plan, because they know their employees’ long-term satisfaction depends on the quality of their retirement savings.

Adjusting Investment Allocations

Even with the dramatic shift of retirement assets into target-date funds (TDFs) or other asset-allocation vehicles, many plans still grapple with participants who are too conservative—keeping all funds in a fixed or low return account—or too aggressive—chasing last year’s winners. The plan review is an opportunity to see if the investment lineup needs additional default funds, managed accounts, brokerage windows or TDFs.

The review is also a good setting to consider adding a Roth deferral feature and even a Roth conversion feature. The tax benefits of these recently expanded plan options may offer participants a way to better diversify retirement taxable income.

Opportunities for Advisers

Year-end plan reviews are an excellent time to start a conversation about fundamental plan design issues. In the current culture of fee disclosure and demonstrating value, plan advisers will want to articulate their value in all aspects of the plans they work with. 

More importantly, plan reviews are a rare window on what plan sponsors need and want. Discussing past plan results with clients and prospects so they can take action to improve future plan operation and avoid repeating past mistakes would certainly make Mr. Santayana happy!

Robert M. Kaplan, CFP, CPC, QPA, APA, is vice president and national retirement consultant for ING U.S., where he uses his 30 years of experience in the retirement industry to help educate a variety of stakeholders on complex regulatory topics, plan design matters, administration and sales strategies.

This information is provided as general guidance. It is not intended to be legal or tax advice. You should contact your legal and/or tax advisers regarding the facts and circumstances around your retirement plan and the applicability of the issues discussed in the communication.

The Markets March 13, 2014

Participants Favored Fixed Income in February

In a reversal of the past four months, participants of defined contribution (DC) retirement plans favored fixed-income investments in February, according to Aon Hewitt’s 401(k) Index.
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Findings from the index show that 10 of the 19 trading days last month saw fixed income receive transfer inflows. Overall, net transfer activity for February moved slightly away from diversified equities (equity assets excluding company stock) of $21 million (0.01%). Total transfer activity across the index was low, valued at $264 million (0.17%). On the other hand, employee discretionary contributions to equities, another measure of participant sentiment, increased to 66.5% in February, up from 65.6% in January.

Overall, DC plan participants’ daily transfer volume for February averaged 0.023% of total daily balances, slightly lower than last month (0.025%). This is below the 12-month daily average of 0.027%. In February, two days had transfer activity above-normal levels. In this context, normal is defined as when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Aon Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

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On average, the index shows that participants’ overall equity allocation increased to 65.5% at the end of February, up from 64.7% in January.

February was also shown to be a strong month for the global equity markets, as they rebounded from their poor showing in January. With U.S. equities, as measured by the S&P 500 Index, the gain for February was 4.6%, and with non-U.S. equities, as measured by the MSCI All Country World ex-U.S. Index, the gain was 5.1% for the month. Emerging markets also increased during February as the MSCI Emerging Markets Index returned 3.3%. The fixed income market posted a positive return, with the Barclays Capital Aggregate Bond Index gaining 0.5%.

The index notes that fixed income asset classes experienced net inflows during February. Bond funds had the largest inflows with gains of $79 million (30%) and GIC/stable value funds followed with a gain of $51 million (20%). In addition, specialty/sector funds had $35 million (13%) of the monthly inflows, while international funds and self-directed window funds both received around $29 million (11%).

As for net outflow, activity was led by company stock funds with $191 million (73%), large U.S. equity funds with $37 million (14%), and small U.S. equity funds with $28 million (11%) transferring out.

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