Client Service December 18, 2017

White Paper Suggests Areas of Focus for DC Plan Sponsors in 2018

A Mercer white paper says defined contribution plan sponsors should focus on ensuring sound plan management and establishing success measures, among other things.

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Mercer has identified what it says are priority areas of focus for defined contribution (DC) plan sponsors as they manage their plans and seek to enable participant success in a white paper titled “Top Priorities for DC Plan Sponsors for 2018.”

“Plan sponsors that prioritize their goals and objectives strategically have the opportunity to both enhance participant outcomes and mitigate risks.” says Sarah Fitzmaurice, DC & Financial Wellness leader, Mercer. “The most dominant trend we are seeing right now in DC plan management is the move to delegating responsibilities to a professional organization. We view delegation as more than risk mitigation; we also see delegation as a path to help improve their participant outcomes.”

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Top priorities identified by Mercer include:

  • Ensure sound plan management: Creating a foundation structured around enabling robust decisions and governance principles such as regular performance meetings, vendor and fee reviews etc. can protect a plan’s fiduciaries should litigation claims arise.
  • Conduct a financial needs analysis for employees: Understanding what issues a sponsor’s employees are facing is critical and yet often overlooked. Once sponsors are understanding employees’ needs, they are better equipped to deliver more relevant, effective solutions.
  • Targeted engagement efforts: A clear communication strategy that simplifies decisions and drives engagement can enhance participant outcomes. Sponsors should consider segmenting their population based on key economic and demographic data; driving action through creating simple investment tiers; offering binary choices where possible; and customizing priorities based on the key needs of each segment.  
  • Establish success measures: Once employees’ needs are evaluated and strategies are developed, establishing and monitoring success measures along with adjusting strategies as required can help enhance participant outcomes.
  • Consider ESG options: Environmental, social and governance (ESG) factors should be evaluated and considered as part of the plan’s manager evaluation program, and consideration should be given to introducing ESG focused options into the plan line-up—which may encourage participation.
  • Enable ‘rainy day’ savings funds for employees: Mercer’s Inside Employees’ Minds financial wellness survey reported that 52% of workers would find a $400 unforeseen expense either difficult to cover (but would manage it) or a major crisis. The industry is beginning to explore parallel retirement and “rainy day” savings accounts. These are in their early days but could prove very effective.
  • Increase diversification: Multi-manager funds provided through a white-label structure can offer great benefits, including reduced manager risk, broader diversification, simple naming conventions that are easy for members to understand, and the ability to quickly and efficiently switch out managers when needed. More activity in the diversified fixed income area in particular is expected in 2018.
  • Consider financial wellness solutions: Some financial wellness needs cannot be addressed by the DC plan. As such, plan sponsors should consider exploring financial wellness solutions that address specific needs, such as financial coaching, student loan repayment plans, short-term loans and income smoothing.
  • Evaluate managed accounts: Although managed accounts are not a new addition to the DC landscape, their role is evolving since their cost has been decreasing; the ability to tailor asset allocation advice to personal circumstances, even if participants don’t input information themselves, has increased significantly and they provide additional support for retirees and broader financial wellness needs.
  • Examine retiree-focused tools and investments: Plan sponsors appear to be allowing—and even encouraging—retirees to remain in the plan post-retirement and to take partial withdrawals. Hence, sponsors should consider how suitable is the investment structure for retirees. There may be a place for some investment options more aligned with retirees needs. Sponsors should also think about how both retirees and pre-retirees can be materially advantaged by being given good guidance. For example, extensive research shows that one of the best options for a retiree to explore is when to take Social Security benefits.
The white paper may be downloaded from here.
Data & Research December 18, 2017

Nonprofit Plan Sponsors Require Deeper Fiduciary Education

A number of key terms commonly present difficulty for nonprofit plan sponsors of all sizes—in particular the terminology surrounding “revenue sharing,” “fee levelization,” “fee policy statements,” and “3(21) vs. 3(38) advisers.”

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The Plan Sponsor Council of America (PSCA) has published the PSCA 2017 403(b) Snapshot Survey, sponsored by Principal Financial Group, reflecting responses from 250 not-for-profit organizations that currently sponsor a 403(b) plan.

At a high level the survey shows fairly strong knowledge among plan sponsors of the most important industry terms and trends. However, a number of key terms commonly present difficulty—in particular the terminology surrounding “revenue sharing,” “fee levelization,” “fee policy statements,” and “3(21) vs. 3(38) advisers.”

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Fully one in three nonprofit plan sponsor respondents are unsure if their plan uses revenue sharing to pay expenses, including 50% of small plans. At the same time, just one in four plan sponsors can confirm if they reallocate revenue sharing among participants, while one-fourth of respondents are admittedly unsure.

PSCA suggests the majority of plan sponsors use an adviser in a 3(21) fiduciary capacity, so-called for the section of the overarching benefits law in which this particular type of adviser-client relationship is enumerated. Most survey respondents could identify whether they used a 3(21) versus a 3(38) adviser, yet a still-troubling 5.6% of respondents could not say for sure. This number is highest among smaller plans.

Also troubling, PSCA says, the data shows about one-fourth of respondents are not aware of what comprises a formal fee policy statement, and half of respondents are unfamiliar with the tenets of fee levelization. There is especially low awareness of what goes into fee levelization among the smallest plan sponsors. The same goes for the construction of investment menus: 7.3% of all respondents were not sure what types of investments their plan offers, jumping to 15.6% for the smallest plan segment.

Additional findings show the percentage of plans aiming to move to zero revenue sharing designs is much higher among the largest plan sponsors. For those with more than 1,000 participants, nearly 21% are moving down this path, compared with just 7% of plan sponsors with 50 or fewer employees.

PSCA’s analysis demonstrates there is a sizable number of plan sponsors—again more in the smaller end of the market versus the larger—who are unsure whether the organization or the individual participants, or a combination, pay the plan fees. Just 1.8% of plans with more than 1,000 participants admit this, while 13.9% of plans with fewer than 50 participants do so.

Continuing the trend, the smallest sponsors are much less likely to have a formal fee policy statement in place: Whereas 50% of plans with more than 1,000 cite having a formal fee policy statement in hand, only 13.9% of sponsors with fewer than 50 employees say the same.

The full survey results are available here.

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