Not long after behavioral finance began scrutinizing retirement plan participant behavior, people began realizing that one behavior—inertia—was hurting employees. It kept them from joining a retirement plan, from keeping on top of their investments and revisiting their contribution level. But what about plan sponsors? It turns out many plan sponsors are hardly models of perfect retirement plan behavior. They might be sluggish about improving or changing their plans and keeping on top of 401(k) trends. Misconceptions about the cost of adopting auto features, for example, abound.
“We battle plan sponsor inertia all the time,” says Holly Verdeyen, director of defined contribution (DC) investments at Russell Investments. Comments range from We’re not a cutting-edge plan to We don’t want to be early adopters.
Cindy Rehmeier, manager of defined contribution plans at Missouri State Employees’ Retirement System (MOSERS) agrees. “Most plan sponsors don’t want to be trailblazers,” she tells PLANADVISER. “Inertia is definitely prevalent in plan sponsor land, as we are plagued with time issues, staffing issues, fighting the usual fires, cost issues and of course fear to make any waves amongst employees by being too paternalistic,” Rehmeier says. “From where I stand in the government plan sponsor arena, sometimes it isn’t inertia that is keeping the plan from moving forward, but rather the inability to get legislation passed to make certain plan design changes, such as various auto features.”
The plan design features that can cause a startle response in plan sponsors are not always groundbreaking. “Moving to more custom fund structures, white labeling investment options or a full plan re-enrollment are hardly cutting-edge features,” Verdeyen tells PLANADVISER. While plan sponsors may be aware these options exist and they won’t be first to adopt them, they don’t want to be ahead of the curve.
First, understand the drivers of plan sponsor behavior, starting with the dynamics of the committee overseeing the plan. “Invariably we see that certain committee members have certain biases for or against a certain asset class,” Verdeyen says. Managers, specific funds or a preference for active or passive investing can all be at the heart of a committee member’s bias.NEXT: Is the committee too old? Too new?
“The tenure of the committee can be a factor. If the tenure of a member is too short, that member may not want to upset the apple cart. With term limits that are too long or when there are no limits, over time some members become more influential and drive more action… or inaction,” Verdeyen says.
The word “paternalistic” comes up frequently, Verdeyen says, and while plan sponsors may say they do not want to be too paternatlistic, the very word can sometimes be used as a catchall that means the company or committee doesn’t want to make changes to the plan.
The committee or the company sometimes invokes participant backlash as a reason not to tinker with the plan. “If they make changes, they’re going to get calls and complaints from unhappy participants,” Verdeyen explains. “In our experience, that is an unfounded fear. We’ve worked to make major overhauls to plans, and their call center phones and administrators’ phones did not ring off the hook, nor did their email inboxes overflow. In fact, plans received more positive than negative feedback.”
Fiduciary liability is another committee fear. “There’s a misconception that the more the committee does to the plan, the more fiduciary risk they’ll have,” V says. “ ‘The less we do, the less liability we’ll accrue!’ In reality, we know that fiduciary liability is not about the change itself, but the process that was followed and documented around the change.”
But there are ways an adviser can help a plan sponsor to take positive action, starting with a consideration of the roles of the different parties involved in a retirement plan.
“Unless these roles are clearly established, discussions about improving the plan don’t occur,” says Todd Hughes, director, of ERISA (the Employee Retirement Income Security Act) and vendor services at Pension Consultants Inc. “Plan design changes are business decisions that come from the settlor of the plan, rather than the fiduciaries of the plan. This means that it is often the board of directors of a company, rather than the retirement plan committee, that must make plan design changes.”NEXT: Two departments, and what holds them back
“When plan advisers look to address plan sponsor concerns, they actually have two separate audiences to consider,” points out Stephen Spear, senior vice president of regional sales at Pension Consultants Inc., “finance and human resources.” Each department can have specific reasons for holding back, and the plan adviser who knows those reasons can help plan sponsors to understand the benefits of improving or changing their plans.
Spear explains that the finance department needs a full understanding of the long-term costs to the company when employees, cannot afford to retire and so continue working beyond typical retirement years. “Industry studies have shown that employees who continue to work solely based upon their lack of retirement funds are less likely to be highly engaged and as productive as other workers,” he tells PLANADVISER.
“Costs begin to accumulate for employers when their long-term workers are earning higher salaries and, at the same time, begin experiencing higher health care costs,” Spear says. “These studies go on to demonstrate that when employees continue in their jobs beyond normal retirement, the results are potential obstacles for other employees’ career paths resulting in loss of critical talent, future leaders and new, innovative skill sets.”
Human resources (HR) may be more aware of when a plan needs changes. “However, HR faces several challenges before those needed changes can be implemented,” Spear says “such as being able to successfully demonstrate to finance that the benefits received by the company will outweigh the potential costs. Many of these decisions are guided by competitive studies of what benefit structures other similar companies have in place, so the need to change may not be immediately evident or appear to be validated by such benchmarks.”
Hughes suggests advisers facilitate improving a plan through annual plan design meetings with the plan settlor. “At these meetings, the plan settlor can determine what their goals are for the plan,” he says. “After all, it’s impossible to determine whether a plan is succeeding or failing unless you know what success looks like.”NEXT: Measure for measure
In some cases, Rehmeier says, “The plan sponsor is not doing the measurements to see if it will actually be viable for income replacement. The number one question is, Is the amount they are saving sufficient?” What percentage of the employees are participating and at what level of contribution are other metrics to look at.
Hughes suggests the plan settlors ask whether the plan is designed the way it is because that’s how it’s always been, or whether it’s deliberately designed to meet their goals. “Do they want 100% participation in the plan and therefore should consider automatic enrollment features, or is lower participation acceptable because they offer a great employer match that is used as a recruiting tool?”
Verdeyen suggests stepping back to understand the nature of a plan sponsor’s bias. “Change is naturally uncomfortable,” she points out, “so there are emotional and cognitive biases around change.” For example, a committee member might have had a negative experience with a particular asset class, leading him to reject that asset class. Another committee member might have a cognitive bias around active versus passive management, believing that active fails to outperform passive management after fees are factored in. She recommends using data to overcome cognitive bias and case studies to overcome emotional bias.
Once the goals are defined, they can take a fresh look at the plan design to consider how best to achieve those goals.
After helping the plan settlor to set goals, the adviser can discuss retirement industry trends and trends in the plan settlor’s own industry that may help to meet those goals. “Plan settlors should regularly be asking what their competition is doing, and whether they need to make changes to their plan to make it a competitive recruiting tool,” Hughes says. “When was the last time they asked employees what they’d like to see from the plan? Are their employees adequately prepared for retirement?”
Making changes to a DC plan is a big inconvenience, points out Verdeyen. “There’s a host of things that the committee has to do on top of its already busy core responsibility: Meet with candidates, send out participant notices, make changes to the recordkeeping system. Change introduces a lot of extra complexity, and it’s another reason plan sponsors are resistant.” Delegating to a third-party can make change feel simpler, she says, in addition to other approaches that can make plan changes feel easier. But first up is getting the plan sponsor to shake the inertia, whether it’s a matter of thinking the plan is “good enough,” or “not broken, why fix it” or just a fear of change itself.NEXT: Questions a plan sponsor should consider
Rehmeier recommends plan sponsors ask themselves questions, including:
- Am I making assumptions about our plan participants? Should we be performing more measurement?
- Are we doing what is necessary to make the plan a sufficient source of retirement income replacement alongside other retirement income sources for the majority of employees?
- What is lacking? Is it the participation rate, average level of savings (balance and contributions) and what is the game plan to move forward on the addition of auto features at levels that will provide the appropriate level of income replacement?
- Are we performing the appropriate amount of education and reaching the majority of employees using the various channels of face-to-face, print, email marketing, social media, text, video, etc.?
- Are we adding important plan design features such as Roth, voluntary auto-escalate tool, comprehensive calculators to determine actual shortage or surplus in retirement?
- Are fees equal?
- Are there too many confusing investment options in the plan’s line-up? Have we surveyed participants on their knowledge of investing/asset allocation? Would participants be more receptive with a simplified line-up making the ultimate decision easier?
- Have we benchmarked investment and administrative fees against our peers? Are investment fees too high considering the passive/active nature or format of the options or are administrative fee too high considering the plan size/complexity?