Many companies have mission statements or philosophies that drive business decisions, the type of products and services they offer and how customers are treated. David Hudak, senior consultant at Portfolio Evaluations Inc. in Warren, New Jersey, says a company’s retirement plan is just another piece of that overall mission. In an article he wrote with Attila Toth, a partner in the firm, the two stress the need for having a plan sponsor philosophy.
Toth and Hudak say a well-defined mission or philosophy can help plan fiduciaries think about the “why” when making decisions and not just the “how.” For an example of why vs. how thinking, the article considers the way an investment committee seeking an Employee Retirement Income Security Act (ERISA)-approved qualified default investment alternative (QDIA) may select a target-date fund (TDF) series. The simple decision to go with a TDF is how the plan meets its QDIA requirements. But those plan sponsors with a well-thought-out philosophy will also elect to assess the glide paths of a group of diverse TDFs, to ensure the final selection aligns with their plan’s goal. This is why one TDF series is selected over another.
“In some cases, plan sponsors have gotten away from the ‘why’ for making decisions,” Hudak says. “Conversations with clients revealed they felt brow-beaten by regulations and litigation, and felt they have gotten out of touch with why they have the plan in the first place. They felt they were losing focus.” This led to the idea of establishing a plan sponsor philosophy.
The process starts with the retirement plan committee asking some open-ended questions. For example, what is the purpose of the plan, does it align with the organizational mission, and does it complement other benefits? Hudak warns that committee members may have different viewpoints in the beginning, but, as they dialogue, they usually can come to a group consensus.
Something to consider is whether the organization wants to be paternalistic. Paternalistic plan sponsors are more likely to offer a match and automatic plan features—and often a higher match and more features—than other plans.
The writers say non-paternalistic plan sponsors believe their primary obligation is to provide employees with the essential components of a retirement plan by meeting all ERISA requirements but not necessarily expanding on them. Beyond that, they feel it is up to the employee to make the most of the opportunities the plan gives him. Then, there are plan sponsors that fall somewhere in the middle.
Another consideration is the type of employee turnover a company experiences. Hudak advises that in industries with very high turnover, plan sponsors should skip paternalism. On the other hand, companies with very low turnover, such as institutions of higher learning, will want to be paternalistic to reward employees and create loyalty, he says.
It is also important to know what other retirement benefits employees are offered, Hudak says. If a large portion of the work force is eligible for a defined benefit (DB) plan, the plan sponsor may tend to be less paternalistic with its defined contribution (DC) plan.
“Having a philosophy shows how critical saving and having money set aside for retirement are for participants,” Hudak says.