“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.
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.