Overcoming Obstacles

As part of the onboarding process with a new adviser, most plan sponsors expect a thorough review of their plan documents and plan design, says Mike Shamburger, head of core markets at T. Rowe Price Retirement Plan Services in Baltimore. “It’s important for the adviser to demonstrate value in this respect, not only at the beginning of the relationship but also on an ongoing basis,” he says.

At a minimum, advisers should review the plan document with their clients’ plan committee at least once a year. These reviews would include looking for any numbers or facts that need to be updated, letting these be a springboard to broader discussions about plan design and whether it may be appropriate to consider or make changes. Regular reviews are part of the process of working with clients, says Steve Wilt, a principal at CAPTRUST, in Akron, Ohio.

“We start with the big picture—things such as company match, eligibility and vesting,” he says. “Then we dig into plan design opportunities such as automatic enrollment, automatic increase, re-enrollment. And we fine tune it from there, looking at how many loans the plan offers, and Roth and distribution options in the plan.”

More than 80% of plan sponsors made changes to their plan design in the two years leading up to Fidelity Investments’ 2020 Plan Sponsor Attitudes Study. Small to midsize plans in particular have been turning to advisers for help, recognizing the growing complexity of the options available—and need for expert guidance on best practices—while minding the specific needs of their company and budgetary constraints.

“Advisers can help plan sponsors look at their participant data and see how participants use the plan, and whether they’re fully engaged and have healthy deferral levels,” Shamburger says. “That will help the sponsor diagnose whether there are things it needs to be solving for.”

If clients hesitate to make changes to plan design, their adviser should talk to them to pinpoint the source of the reluctance, Shamburger says. Typically, the issue is workloads, cost or competing business objectives, he says. “If that’s the case, then those things are addressable.”

One way to help, he says, is by setting up a schedule and calendar—basically, a simplified project plan—for the client. This makes a new process more manageable, establishing what needs to be done and who can do it, he says. “People are generally change-averse, so formalizing a written timeline can help them feel more in control. It can also help the adviser uncover any unvoiced concerns or hesitancy with moving forward.” For financial issues, he suggests further cost-benefits analysis and projecting costs into the future. “A savvy adviser can add some real value by offering solutions.”

Given the turbulence of the past year, retirement plan committees have been more active, holding 20% more meetings in 2020 than in 2019, Callan’s Defined Contribution Survey shows. Consequently, advisers have had more opportunities to engage with their committees—which may have been less motivated to make changes in the past or may have kicked the can down the road on solidifying a decision.

Here is a look at several factors that advisers should discuss with their committees to determine whether refreshing their plan’s design and documents—as well as committing to make the adjustments—makes sense.

Regulatory Changes

Many regulatory changes have come along in recent years that influence plan design, so it is important for plan sponsors to understand not only whether their plan remains compliant, but also whether they may now have access to plan features they previously did not. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which passed in 2019, for example, eased the way for employers to offer in-plan annuities.

“As the law changes, it’s important for employers to look at what they’re offering and make sure it gives them the best benefit,” says Kristin Bulat, senior vice president, strategic resources, at NFP in New York City. “A well-designed, well-thought-out plan provides benefits to both employers and the employees. When you can have a win-win situation like that, you want to make sure it’s the best plan for both.”

The SECURE Act also required that most sponsors permit part-time employees to participate in the company retirement plan once they have worked at least 500 hours for three consecutive years. This mandate may require an update for sponsors that previously had more restrictive plan eligibility requirements.

Additional pertinent legislation may be coming soon, too, as a bill dubbed “SECURE Act 2.0” keeps gaining support. One provision lets participants receive match money on student loan payments and save it in their retirement account; another could change rules for required minimum distributions (RMDs), says Jerry Patterson, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa.

Shifting Business Priorities

One reason that companies have a 401(k) plan, besides to help employees save for retirement, is that it can help them meet their own business objectives. As those objectives change, the sponsor might need to adjust the plan accordingly; here, advisers can offer guidance, Shamburger says.

For example, an employer focused primarily on worker retention might look at a longer-term vesting schedule, to incentivize employees to stay longer than they would otherwise, or it might offer a larger match, says Jolene Workman, vice president of customer care at Principal, also in the Des Moines office. Those who hire many new graduates might decide on a student loan repayment program.

Smaller businesses that want to maximize the amount they contribute on behalf of higher-paid employees might consider a safe harbor plan, which eliminates compliance testing, Shamburger says.

“A company might look at key employees and think about ‘How do we make sure we retain these individuals?’” Bulat says. “Maybe it’s launching a new product line or some initiative, and it recognizes these people will be crucial. Then it looks for a plan that aligns with a five- or seven-year goal to try to keep them.”

Business priorities for some employers might be more employee focused. Plan sponsors concerned that personal financial issues are affecting employee productivity might consider a holistic financial wellness programs or plan designs that incorporate participant education. Discussing such benefits may also help illustrate the value of plan design changes to uncertain employers, Shamburger says.

“Most changes are aimed at improving the performance of the plan or the participants over time,” he says. “Advisers can help sponsors better understand the direct and indirect costs of the plan and explain the value that happier, more engaged, more productive and more loyal employees can provide.”

Poor Participation

A key goal of most sponsors is to drive employees’ participation in the plan and increase the amount that each one contributes. For sponsors unhappy with plan participation, advisers have plan design changes to suggest as a remedy.

“There are few times in life when you truly come across silver bullets,” Patterson says. “Contemporary plan design automatic features, combined with what we’ve learned about human behavior, are truly silver bullets in retirement savings. We’ve seen tremendous success in the past decade from getting sponsors to make those changes.”

Instituting, or increasing, an employer match can make a difference in both enrollment and the contribution amount per participant. Still, it also can increase the plan’s total cost. Other effective options to consider, on their own or in combination, are automatic enrollment, automatic escalation and automatic re-enrollment. Saving rates in employer plans with auto-enrollment are 56% higher than those in plans without an auto-enrollment feature, a Vanguard study found.

Changing Demographics

As the makeup of an employer’s workforce changes, so do its financial priorities—and the features of a plan that might serve it best. Advisers can discuss with plan sponsors their employee demographics and how to design a plan that will best meet the group’s needs. Younger employees, for example, or those living paycheck to paycheck, might benefit from sidecar savings accounts, while a staff approaching retirement might have more interest in lifetime income products and learning about retirement withdrawal strategies.

“You have a finite employee benefit budget, so you want to support the features that will help the people the most,” Shamburger says. “That also demonstrates to employees that the employer wants to provide the most value it can for its associates. If it never makes changes to the plan, [the plan] doesn’t appear to be a priority.”

Evolving Best Practices

The industry is constantly evolving, offering new products and studying the efficacy of existing ones. As research has shown how effective financial wellness tools and auto-enrollment are, for instance, they have become much more widely available for sponsors to employ. Less than 25% used such a feature in 2005, but more than 70% had adopted one by 2018, a T. Rowe Price paper, “Insights on Retirement,” shows.

Just as forward-thinking advisers might have suggested their clients adopt auto-enrollment, they might now be stressing increasingly popular features such as in-plan Roth conversions or in-plan annuities.

“You spend so much time recruiting top employees, you want to hold onto them, and sometimes the best way is with the 401(k) or the defined contribution [DC] plan,” says Dave Paulsen, a senior adviser at Annexus Retirement Solutions, in Scottsdale, Arizona. “Now, we’re seeing some innovation in the industry for getting people not just to retirement but through retirement.”

For plan sponsors still not sold on adjusting their plan, their adviser can create models to show the potential impact if they did. This can coax the client toward a decision, Workman says. “The modeling can be powerful in driving awareness … for any potential plan cost changes, in a way that is actionable,” she says.

Art by Arom Ju