8 Things DC Sponsors Should Consider for 2013

December 7, 2012 - 2012 was a busy year for defined contribution (DC) plan sponsors.
By PS

Many spent considerable time fulfilling the Department of Labor’s (DOL’s) fee requirements, reacting to developments in the stable value environment, weighing the pros and cons of retirement income solutions, and evaluating the implications of peers’ DC lawsuits—all while handling the usual responsibilities associated with their DC plans. With the year drawing to a close, plan sponsors may wish to take a moment to review all they have accomplished over the past 12 months—then create a to-do list for 2013.   

As we look forward to the next year, Callan offers eight action items that it believes should be on every DC plan sponsor’s list of priorities:  

1. Benchmark plan fees and services. The DOL’s required fee disclosures resulted in an avalanche of information for plan sponsors. The onus is on fiduciaries to benchmark the fee and service data they now possess. In this evaluation process, plan sponsors may wish to consider not only the reasonableness of plan fees, but the manner in which they are paid. For example, is revenue sharing a well-considered approach to pay for plan administration? Would a flat, per-participant fee be more equitable? Some plan sponsors have even gone so far as to create a fee payment policy, either as part of their investment policy statement or as a separate document. At a minimum, plan sponsors would be wise to document their fee evaluation process.   

2. Review the investment policy statement (IPS). According to Callan’s 2012 DC Trends Survey, while most plans have an IPS, nearly half failed to review it in the past 12 months. With some fee lawsuits focusing on plan sponsor adherence to the IPS, it is critical that the document be reviewed, made consistent with best practices, and be well understood by the Investment Committee. The ideal IPS gives clear guidelines, creates a reasonable process, provides a roadmap for making sound, long-term-oriented decisions, and outlines criteria to keep the Investment Committee on track.

3. Assess the investment menu. Many plan sponsors perform investment structure evaluations as part of their regular due diligence process. In the current dynamic investment environment, they might focus specifically on:  

• whether their capital preservation fund remains appropriate for the plan;  

• whether it is possible to streamline the investment fund lineup; or conversely, identify additional diversification opportunities, such as portfolios structured to provide inflation protection; and  

• how comfortable they are with their qualified default investment alternative. 

 

4. Determine if institutional vehicles make sense in the plan. A recent Callan study revealed that, depending on plan size, the use of non-40 Act vehicles over institutional share classes of mutual funds reduced weighted plan fees by 20% to 35%. (Ellement, Jason L., FSA, CFA, MAAA, Lucas, Lori, CFA, and Veneruso, James, CFA. “The Long-Term Impact of Fees on DC Participant Balances.” Benefits Quarterly. Third quarter 2012.) The study also found that non-40 Act vehicles can provide advantageous fee structures even for plans with less than $500 million in assets. It is important to recognize that major recordkeepers are increasingly willing to support potentially more cost-effective collective trust and even separate account structures. Given these circumstances, plan sponsors should consider whether these institutional structures make sense for the plan.   

5. Examine the plan’s target-date funds. After the passage of the Pension Protection Act (PPA) in 2006, plan sponsors rushed to add target-date funds as their qualified default investment alternative, and many settled on their recordkeeper’s target-date funds. The present-day appropriateness of the selected target-date funds should be reviewed, because what seemed like a good fit for the plan six years ago might no longer be so. Plan sponsors may wish to re-evaluate their current target-date fund family for a number of reasons: plan demographics may have changed, the defined benefit plan may have disappeared, better target-date fund alternatives may have entered the market—even the size of plan assets may have increased enough to make it possible to use a custom target-date fund series.

6. Revisit auto features. The good news is that half of plans offer automatic enrollment and nearly as many offer automatic contribution escalation. The bad news is that many plans implemented these auto features very conservatively, resulting in less-than-optimal outcomes. Only plans that adhere to the automatic enrollment safe harbor for non-discrimination testing under the PPA have a prescribed deferral increase rate and deferral cap for automatic contribution escalation. Plans that do not seek the safe harbor can safely exceed the designated levels. A study by DCIIA and EBRI finds that ratcheting up the defaults under auto-enrollment and auto-escalation can dramatically improve retirement income replacement potential. (The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy. 2010. DCIIA and EBRI.) A robust implementation of auto features would include a default contribution rate of no less than 6%, with auto-enrollment escalating participants to at least 15% (with a 1% to 2% annual contribution rate increases).   

7. Check the plan’s policy on terminated participants. Terminated participants can be viewed as an asset or a liability. On the positive side, retirees in particular can represent significant assets under management that can bring economies of scale to the plan. Conversely, terminated employees can increase administrative costs and litigation risk. Plan sponsors would do well to consider how terminated participants fit into the DC plan and what steps should be taken to support them.   

8. Evaluate participant communications. Recordkeepers are becoming increasingly sophisticated with participant communication. Many can provide DC participants with retirement income projections, and offer a range of targeted and personalized communications geared toward changing participant behavior and outcomes. Social media is even being adapted to encourage younger workers to participate in DC plans at higher levels. Plan sponsors would be wise to make sure they understand the full scope of communication possibilities and are leveraging cutting edge resources to benefit participants.  

 

This article was authored by Callan Associates’ Defined Contribution Practice Team. Founded in 1973, Callan is one of the largest independently owned investment consulting firms in the United States. Today the firm advises institutional investors collectively responsible for more than $1.8 trillion in total assets. 

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