Client Service October 21, 2024

Plan Sponsors Seeking ‘Higher-Touch’ Adviser Services

A Morgan Stanley survey of 200 plan sponsors found a trend toward more service needs, including 3(38) investment management.

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Plan sponsors seem to want more from their advisers, but that desire could pave the way for more paid services, according to a survey released Monday by Morgan Stanley.

In a survey of almost 200 401(k) plan sponsors, 80% said they work with plan advisers on their plans, and their responses highlighted a desire for more services related to investment decisions, participant planning tools and direct participant education, according to the qualified plan and wealth advisory’s 2024 Retirement Plan Survey.

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When honing in on investment services, the survey found a shift toward 3(38) services, in which an adviser makes the investment decisions for the plan, as opposed to 3(21) services, in which a fiduciary makes recommendations.

“While 3(21) relationships are still about twice as common as 3(38) relationships, the gap is likely to continue closing,” Morgan Stanley wrote in the report. “Most 3(38) users have initiated these engagements in the past five years, and about half of the non-3(38) users are considering switching to this type of engagement.”

According to the survey, about 55% of plan sponsors have a 3(21) relationship, as compared with 27% who have a 3(38). More than half of those 3(38) setups began in the past five years. However, another 42% of sponsors are considering moving to a 3(38) investment manager.

“The increasingly complex investment and regulatory landscape is a catalyst for the continued rise of 3(38) relationships,” the firm wrote in the report.

The survey polled plan sponsors with assets ranging from $50 million to roughly $1 billion.

Participant Education

Another, perhaps less lucrative, area for advisers, at least initially, is plan sponsor demand for participant education and financial guidance for all employees.

Plan sponsors identified consultants and advisers as the most common source of participant educational resources at 47% of respondents. That outranked recordkeepers (46%), third-party providers (42%), internal staff (36%) and asset managers (23%).

“Historically, sponsors have predominantly relied on recordkeepers to provide these tools and resources,” the researchers wrote. “But recently, other service providers in the retirement ecosystem have begun offering this content, and today consultants/advisors are the most common source, according to our survey. This trend should continue as leading consultants continue to expand their core offerings to include participant education and engagement resources.”

Much of that education, according to the report, comes from education tools and resources such as online retirement planners (85%), account review and analysis tools (74%) and educational content (73%). But those are closely followed by live remote training sessions (52%), personalized financial guidance (50%) and live in-person training (47%).

Investment Lineups

Finally, the survey pointed to shifts in what plan sponsors want to see in an investment lineup.

While sponsors are not looking to increase the number of asset managers they use, more than one-third want to be able to offer expanded investment options. About one-quarter are likely to look for help in doing so (23%), with the other 77% saying it will be at least somewhat easy to make the move.

When it comes to adding relatively newer investment options for participants, plan sponsors appear to be taking action, having added or currently in the process of adding: target-date funds with guaranteed payouts (71%), multi-asset strategies (65%) and hybrid default investment options (56%), according to the survey. Meanwhile, 64% reported offering a managed account, and 22% more plan to do so.

Even retirement income solutions are making headway, with 41% of plan sponsors saying they are offering them and an additional 44% intending to. However, there are various stumbling blocks plan sponsors see in these solutions.

According to the survey, participant understanding and education leads the list of concerns at 65%, followed by fiduciary concerns at 53% and relatively higher fees at 48%.

“Offering participants access to educational materials applies to every part of the plan lineup,” the researchers noted. “But the need is particularly acute for retirement income solutions given how complicated these tools can be and how differently they work from mutual funds, traditional target date funds or other common savings tools.”

Compliance October 18, 2024

ERISA Committee Wants More Guidance From IRS on Student Loan Matching

ERIC makes the request after guidance the IRS gave this summer.

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The ERISA Industry Committee is looking for more guidance from the IRS on how retirement plan sponsors can satisfy non-discrimination testing and other specific “unanswered questions” to help plan sponsors implement the student loan match program now permitted under the SECURE 2.0 Act of 2022.

On Friday, ERIC submitted a letter requesting additional technical guidance from the IRS to further help defined contribution plan sponsors provide employer matching contributions to retirement plans, based on a participant’s qualified student loan payments. ERIC referenced “several unanswered questions” about how the Department of the Treasury and the IRS would interpret Section 110 of SECURE 2.0.

The comment period on the August IRS notice, which applies to plan years beginning after December 31, 2024, ends Friday.

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First, ERIC urged the IRS and Treasury to publish model amendments—either as a follow-on notice or as a proposed regulation—to provide specific language that plans should include about satisfying non-discrimination testing. ERIC asked the IRS and Treasury to also provide model certification language that plan sponsors can use for employees to certify their qualified student loan payments.

In particular, ERIC asked that forthcoming regulations confirm that a plan sponsor has the flexibility to use either the actual deferral percentage test described in the notice each year or an alternative method, if needed, during plan year testing.

Certification Requirements

In addition, ERIC requested additional guidance on certification requirements that would qualify student loan borrowers to receive a matching contribution to their defined contribution plan accounts.

The August guidance from the IRS laid out five elements a plan must receive to certify the student loan payments:

  1. The amount of the loan payment;
  2. The date the loan payment was made;
  3. That the payment was made by the employee;
  4. That the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee’s spouse or the employee’s dependent; and
  5. The loan was incurred by the employee.

Any of the items can be satisfied though “affirmative certification” by the employee, according to the IRS. The first three items can also be satisfied by independent verification by the employer.

ERIC requested that any future regulations should confirm that plan sponsors and administrators are allowed to receive information about the amount and date of loan payments either directly from the student loan lender or from a third-party service provider.

Some benefit plans use third-party service providers to provide financial wellness tools to employees, including those with student loans, ERIC noted, and the tools can link student loan information with a retirement plan recordkeeper’s platform.

However, the Department of Education, in interpreting the 2020 Stop Student Debt Relief Scams Act with the goal of reducing fraud, has recently required student loan servicers to prevent access to their data. ERIC argued that this limit on data sharing has hindered third-party service providers from helping verify participant and loan data. An application process for trusted third parties may eventually be implemented but, as of now, has not been.

“This has the potential both to reduce implementation of the matching programs envisioned by Section 110 of the bipartisan SECURE 2.0 Act and to result in worse financial outcomes for plan participants,” ERIC argued in its letter. “It also adds to the burden for plan participants, as they will need to manually certify information that could be certified through the service-providers.”

ERIC urged the Treasury Department and the IRS to coordinate with the DOE and to alert the DOE of the potentially negative consequences of restricting access by third-party service providers.

Clarification on ‘Reasonable Procedures’

In the letter, ERIC also sought examples of “reasonable procedures” that a plan sponsor is permitted to adopt to implement a qualified student loan match feature. Under the IRS guidance, a plan may establish a student loan match claim deadline for a plan year or multiple deadlines for claim submissions, provided that the deadlines are reasonable, based on a facts-and-circumstances test. The IRS specifically noted that a deadline three months after the end of the plan year would be permitted.

As a result, ERIC stated in its letter that the IRS should confirm that a deadline within the first month after the plan year ends is also reasonable. The IRS should also specify the permissible timeframe for quarterly deadlines, as well as any deadlines for contributions made on behalf of terminated employees, ERIC argued.

Overall, ERIC urged that plans be given maximum flexibility in order to facilitate the operation of this plan benefit.

ERIC is a national advocacy organization that exclusively represents large employers that provide health, retirement, paid leave and other benefits to their employees.

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