Towers Watson Provides Road Map for DC Investment Choices

Identifying a plan sponsor’s objectives for a defined contribution (DC) plan should drive the investment consulting process.

Objectives should be specific, achievable and within the control or influence of the plan sponsor, according to a report from Towers Watson. The role or purpose of the DC plan within the plan sponsor’s overall total rewards benefit offering should be of primary consideration in identifying goals and objectives. The report noted that plans designed to maximize a participant’s retirement savings and investment success will look much different from plans designed exclusively to meet minimum legal and regulatory requirements.  

Participant investment behaviors, needs and risks must also be considered when designing the investment structure. “With individual direction of investment decisions, DC plans have material implementation challenges that, if not recognized and addressed, can unravel even well-designed investment structures,” the report said.

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Towers Watson said successful identification and awareness of governance capabilities should determine the relative complexity of the investment structure and manager implementation. The likelihood of meeting investment goals is directly related to the governance budget employed. Complex investment structures and/or strategies require plan sponsors to develop more effective decisionmaking processes.

 

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In addition, well-engaged participant populations are more likely to successfully implement more complex investment structures. The total number of investment options offered to plan participants should be limited in order to maximize governance budget, preserve asset-buying power and facilitate participant engagement.  

DC plans carry a significant level of fiduciary risk because of participant exposure and should use an appropriate level of governance that reflects investment portfolio complexity. A sensible reference point may be the level of governance afforded to the sponsor’s defined benefit plans to manage risk, the report said. The use of active management should be reserved for the higher governance and higher manager conviction structures.  

Among other things, Towers Watson suggests regular fiduciary education and training for investment committee members is a fundamental component of a successful plan. Every DC plan should have an investment policy that articulates investment objectives and constraints, such as governance and risk tolerance, as well as evaluation metrics for the investment options. Every DC plan should have a fee policy statement, and a process for evaluating and monitoring plan fees on an ongoing basis. Further, every plan should regularly evaluate and monitor the cost of plan administration and other services.  

The full report, “Towers Watson Investment Services Defined Contribution Beliefs,” can be downloaded here.

 

Financial Plan Launches 401(k) Branch

Financial Plan Inc. of Bellingham, Washington, launched a new branch of business dedicated to 401(k) plans.

With its new program, Financial Plan is adding more transparency and cost-effective solutions to Employee Retirement Income Security Act (ERISA) pensions, profit sharing, 401(k) and 403(b) plans.

The fee-only model of Financial Plan allows its advisers, who work as ERISA 3(38) fiduciaries, to put clients’ needs first and get away from hidden fees. Financial Plan’s advisers are not paid on commission, nor tied to any brokerage firms, platform providers, third-party administrators or investment companies.

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“Our process allows us to take on certain liabilities associated with managing 401(k) plans that were previously left on the shoulders of plan fiduciaries,” said W. Devin Wolf, wealth manager at Financial Plan. “By rethinking every step of the process, we have built a program that benefits plan participants, not brokers.”

Financial Plan works with plan sponsors and administrators to ensure plans are designed in a simple way to accomplish goals. The advisers also focus on participant education, which the company said is the “single largest factor in future success.”  

Additional information about Financial Plan’s new 401(k) branch is available at  http://www.financialplaninc.com/401k.


 

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