Client Service June 19, 2018

Considerations for Helping Terminating and Retiring Participants

“If a plan sponsor can invest in an adviser or other person to provide direction for terminating or retiring employees, that would be extremely helpful,” Terry Dunne, from Millennium Trust Company, told 2018 PLANSPONSOR National Conference attendees.

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“The number one duty of defined contribution (DC) plan sponsors is to act for the best interest of plan participants. And, beneficiaries and terminated employees are still participants,” Jamie Greenleaf, lead advisor and principal at Cafaro Greenleaf, pointed out to attendees of the 2018 PLANSPONSOR National Conference.

Terry Dunne, senior vice president and managing director of Retirement Services at Millennium Trust Company, added that when plan sponsors spend so much time and energy trying to create a retirement plan, they should not just focus on the specific period of time when someone works, but also for when someone retires. “Make sure you are doing as much as you can for participants when they retire or leave work,” he said.

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Dunne noted that the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) efforts to create conflict of interest standards are focused on the adviser community to make sure advisers are going to present opportunities, investments or IRAs in the best interest of participants—making sure costs are not too significant and investments are not too risky, and there is a proper level of diversification in investments for retirees or terminated employees.

Greenleaf pointed out that these regulations and discussions around them have put the focus back on participants—the end user of the plan. Some plan sponsors didn’t know they were fiduciaries until this discussion, she said.

She suggested that retirement plan committees put together a mission statement, hopefully looking at the plan as a retirement benefit—not just addressing the accumulation phase, but also the decumulation phase. “Look at distribution options and investments that are optimal for those near and in retirement,” Greenleaf told conference attendees.

Dunne added that plan sponsors should think through carefully what to do if a participant is leaving employment. Plan sponsors need to improve their communications and make terminating participants feel they are well-advised and understand what their options are. Plan sponsors should also encourage individuals to stay connected with the company if they leave their assets in the plan. “Just turning decisions over to participants at the time of termination or retirement without guidance can hurt their retirement success,” Dunne said.

Assets left in the plan can drive overall costs down, but when an employee leaves the company, plan sponsors have less contact with them, and fiduciary duties to provide notices becomes more difficult if the plan sponsor loses track of them, Greenleaf noted.

Dunne said “missing” participants are not really missing. Plan sponsors just need to use the right tools to find them.

Tools for second phase in life

Protecting DC plan participants from themselves so that they can be better prepared for retirement post-employment means protecting the benefits the plan sponsor is trying to provide for them, according to Greenleaf. She said the retirement plan committee needs to reduce the potential for plan leakage—reduce the number of loans participants can have, increase the interest paid on plan loans, and do not allow age 59 ½ in-service distributions, for example.

Greenleaf also questioned why terminated participants with a balance less than $1,000 are treated differently than those with a balance between $1,000 and $5,000. She suggested plan sponsors rollover, rather than cash out, balances less than $1,000 to keep participants’ investments protected for future use. “Hopefully the participant will decide to move the money to a new employer’s plan,” she said.

Regarding the plan leakage issue, an attendee suggested plan sponsors let terminated participants take loans from the plan so they are paying back money into the plan, as well as allowing participants who terminate to repay loans after termination.

Dunne said his firm is seeing larger plan sponsors implementing sidecar individual retirement accounts (IRAs), creating an opportunity for individuals fully contributing to the plan to continue to contribute towards retirement if able.

He also pointed out that there is so much conversation among legislators and regulators to encourage people to have guaranteed income. “I think it will take a few more years for things to happen, but there is movement in that direction. Participants are interested in that. We need to create a [defined benefit] element for DC plans for income in retirement,” Dunne said.

In the meantime, Dunne suggested plan sponsors provide information, education, and calculators to help participants turn their DC assets into income in retirement. “If a plan sponsor can invest in an adviser or other person to provide direction for terminating or retiring employees, that would be extremely helpful,” he said.

Greenleaf added that engaging retirement plan participants is difficult, but engaging them at retirement is a lot easier because it is relevant and meaningful to them. She suggested plan sponsors hold education meetings specific to the participant group close to retirement, focusing not only on what to do with DC plan assets, but about Social Security and Medicare.

Responding to an attendee question about handling uncashed checks of either required minimum distributions (RMDs) or cashouts of low balances, Dunne reiterated that there are many tools to search for “missing” participants.
In Practice June 19, 2018

PSNC 2018: Asset Allocation Comprehension for Plan Sponsors and Participants

The panel focused on current asset allocation trends, and then shifted to what plan sponsors and participants need to know about these investment products. 

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At the PLANSPONSOR National Conference (PSNC), a day two session covered the latest trends among asset allocation vehicles, particularly target-date funds (TDFs) and managed accounts.

At the start of the session, 84% of audience members said they have TDFs as qualified default investment alternatives (QDIAs) in their plans. Whereas once managed accounts and TDFs had reigned as equals, the first question the panel asked was if, in a TDF-dominated world, there is any room for managed funds and accounts.

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Greg Jenkins, managing director and head of institutional defined contribution at Invesco, replied that, whether managed accounts or TDFs, the answer is communicating with participants to understand what account or fund works best with their needs. Instead of debating superior investment options, plan sponsors should educate participants on what TDFs and managed accounts are, he says.

“We’ve been doing research on language, and we found again and again that the word target date, glide path, etc., participants don’t know about them,” he said. “There’s a real disconnect between what participants understand and what’s possible in your plan. It all depends on your company and how you communicate with participants.”

Joseph Lee, senior vice president and head of retirement investment solutions at First Eagle Investment Management, agreed, adding how important it is for plan sponsors to ask questions.

“Gather more information. The solution that requires the least amount of assumptions is probably right,” he said. “The thing that we need to determine is what is the right solution for our employees? Is everything okay in their life? We need to dig into that a little further.”

Chad Cowherd, vice president and head of client relationship management at American Century Investments, believes TDFs and managed accounts can prosper in the same plan, but he said the latter may prove tough, due to their well-known issue with regards to benchmarking. While managing a TDF can be difficult, benchmarking managed accounts has shown far more of a challenge due to their increased personalization and customization features.

“TDFs and managed accounts can live in harmony in a plan … Managed accounts are also a little bit harder to benchmark and compare. They tend to lean more towards low-cost and passive,” he said.

On the subject of multiple target-date suites in a single plan, Cowherd added that while industry professionals previously believed more is better, that ideology has since diminished. Instead of helping participants, greater investment options may only overwhelm them, he said.

“The industry has gone from thinking it’s better to get more, but now we’re going back because it’s not,” he said. “You need to make things simple. Participants actually stop deferring when they have too much choice and when it gets complicated. If they’re not using it the right way, that’s in nobody’s interest, not even mine.”

Circulating among recent industry and investment trends are robo advisers, and the question of whether these online tools can increase participant engagement or interaction. Since their inception, robo advisers have expanded to launching retirement planning products and services, but Cowherd sees the feature as a wealth solution instead, adding how a robo advisers’ help is only exemplified with a real-life adviser near.

“That feels like more like a wealth solution than retirement,” he said. “I feel like if you’ve got a robo product and an adviser sitting with a participant, that robo becomes more real.”

In an effort to relieve questions and confusion from plan sponsors, panelists discussed a series of recommendations to help employers get on their feet. Suggestions included hiring consultants and informing them of the plan, relaying hard work to employees, and understanding the plan’s needs.

“At the end of the day,” continued Cowherd. “It’s looking at what you have and what can help you move forward.”

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