The Value of Determining a Retirement Plan’s Philosophy

A seldom-discussed tool that can help improve retirement plans is determining the plan’s philosophy, or understanding the underlying reason why a company is offering the plan. Retirement industry executives say that while it may sound lofty, determining a sponsor’s philosophy for their plan can be very instructive in strengthening the design of the plan and, as a result, improve the outcomes for participants.

“This is broader and potentially more impactful than having an investment policy statement [IPS] or retirement committee charter,” says Kevin Crain, head of workplace solutions integration for Bank of America. “It instructs a plan sponsors to give serious thought to what they want to achieve for their employees to help them live comfortably in retirement. It forces them to think about how paternalistic they want to be in that philosophy. It also raises the question of whether or not they want to take care of employees who have retired. I also believe that any company offering a financial wellness program needs to go through the philosophy exercise. It is imperative to have a retirement plan philosophy as a pillar of that financial wellness offering.”

A plan’s philosophy will play a critical role in its design and in helping the company decide to offer other important benefits, such as a health savings account (HSA), Crain says. Retirement plan philosophies are not very prevalent today, he says. It’s also not very common for companies to actively encourage their workers to take advantage of all the benefits they offer, Crain adds.

“This is an area where companies need to do more work, and those that have a retirement plan philosophy need to make that a reality,” Crain says. “Employers need to become more proactive with their plan design, such as including robust escalation at meaningful deferral levels, sending information to employees about their projected retirement income, and offering retirement income options for those who are retired, either through a target-date fund [TDF] or an annuity.”

Buck makes it a point to help each and every one of its plan sponsor clients develop a retirement plan philosophy, says Sandra Pappa, a principal in the wealth practice at Buck. “It helps them realize that the ultimate goal of their plan is to help each employee build sufficient savings for retirement,” Pappa says. “It is best when that philosophy aligns with the company’s demographic makeup, culture, the financial constraints of its workers and their retirement needs. The philosophical framework will support distinct retirement plan priorities, which will then drive decisions about the plan and necessary changes.”

Along with developing a philosophy, the plan sponsor and adviser need to analyze strengths and weaknesses in the plan by parsing through recordkeeping data, Pappa says. “This can be instructive when a change is made or to help the sponsor realize if further adjustments are needed,” she says.

UHY helps its clients develop a philosophy by asking them what their objectives are for their plan, says Therese Wolfe, a principal at the accounting firm. “Most plans cannot achieve every objective, but we try to help them meet as many as possible,” Wolfe says.

In a blog about developing a retirement plan philosophy, Portfolio Evaluations Inc. says it is time-consuming but beneficial: “Establishing a plan sponsor philosophy is a challenging process, one that needs ample time and attention. It requires thoughtful contemplation of what a retirement plan’s objective should be and how a retirement plan committee can affect that objective. While potentially an arduous task, organizations that go through this process should find it easier to make plan decisions going forward, saving time down the road, while having those decisions be better aligned with their retirement plan’s intended purpose.”