Finding the Starting Point

Deciding where to start is a critical and challenging part of serving retirement plans. 

Holly Verdeyen, director of defined contribution investments at Russell Investments, says where plan advisers can help the client most “depends on the plan sponsor’s starting point.”

One lesson retirement plan service providers learn quickly is that each plan is different—with different demographics, levels of employer commitment and amount of groundwork done. But as Verdeyen observes, keeping fees down is pivotal for all plans.

“Plan governance and plan menu design are also big areas to focus on because good governance is key for proper plan oversight,” she adds, “and plan design drives participant behavior.”  

She says advisers should also generally encourage plan sponsor clients to revisit how their participants’ portfolios break down, based on their age, and do a full plan re-enrollment, moving non-responding participants into the plan’s qualified default investment alternative (QDIA), if necessary, she says.  

For plan sponsors still unsure about the value of “institutionalizing” their plans, Michael Swann, director of DC strategy for SEI Investments Co., recommends leveraging industry thought leadership to demonstrate how participants’ behavioral tendencies can sabotage their saving habits and how institutionalization could counteract that, increasing the whole retirement program’s effectiveness.

For example, he says, “there have been several studies done that have shown the fewer choices that you offer participants—and just choices in general if you look at behavioral economics—the better decisions people tend to make, from enrolling in the plan to deferring in the plan to how they allocate their money.”

NEXT: Fighting the ‘maintenance mentality’

Swann continues: “With a broader approach and a simplified menu, you might have only two options that are active in U.S. equity—a large cap and maybe a small cap. If you have these two options and they contain both growth and value managers, there’s a lot less temptation to chase performance when you’re only making a strategic decision between two different market caps.”

This simplification—a best practice of institutional plans—encourages participants to think more strategically and longer-term about their allocations, Swann says.

Advisers could also begin with a custom analysis of both replacement income targets and the projected effect on the company’s bottom line if participants need to work past retirement age.

“It really comes down to defining success,” Verdeyen says. Noting that advisers often help their sponsor client define and measure what success means to a plan, she urges them to frame institutionalization as something that can have a measurable improvement on their employees’ ability to successfully retire. 

To this end, they can provide data on how institutionalizing the plan can lead to better participant outcomes, in terms of lower fees, improved participant decisionmaking, a more equitable distribution of administrative fees and greater transparency.   

Some plan sponsors may just be satisfied with the status quo and resist making this change—either in total or just in part. “Some DC plan sponsors may believe their DC plans are basically good enough,” she says, “and they are content to operate in maintenance mode as opposed to improvement mode. Again, it’s a mindset,” she says.

For the rest, Verdeyen warns against “the maintenance mentality,” wherein plan sponsors will focus on just maintaining changes made so far. “Advisers should encourage their clients to not lose sight of the more strategic decisions, like plan menu design, qualified default investment alternative [QDIA] selection and plan mapping decisions, which can really move the dial when it comes to participant retirement readiness,” she says.