Alongside Adams were panelists Mark Davis, a partner at Kravitz Davis Sansone, Fred Reish, Managing Director at Reish Luftman Reicher & Cohen and winner of PLANSPONSOR’s Lifetime Achievement Award, and Michael Barry, President of the Plan Advisory Services Group.
align=”center”> The Panel Audio File
Asked to predict the upcoming concerns of the next twelve months, everyone agreed that 401(k) fee disclosure would be a prominent focus, as Reish asserted, “Anybody other than Rip van Winkle knows that that is the issue of the day, bar none.” While plan sponsors have previously been concerned only with costs, they will now be asked to assess fees as well. A proposed 408(b)2 regulation would require not only the disclosure of direct and indirect revenues, but also the significant conflicts of interest that could, potentially, affect relationships with a service provider. Reish distinguished between fees and revenues, saying, “A mutual fund may charge you a hundred basis points, part of which is a transfer-agent fee, but it then gives that fee to your record keeper, so it’s certainly a cost to your plan, it’s not revenue to the mutual fund.” If all of this information is made readily available to plan sponsors, they must decide how it will affect their business relationships.
Forcing Information on Participants?
Apart from disclosure at a committee level, the question arises of whether or not information should be forced on participants who do not want it. Receiving information about the funds they might invest in and what those funds return, Davis noted there will likely be a disconnect between their expected returns and what is found in their actual accounts. Are they obligated to become familiar with associated costs? If they are not concerned about processes with which they are not already aware, will they be held accountable for that knowledge?
When analysts offer projections of what retirement will be like for their clients, they may give unrealistic estimates that leave participants with a gap between their expectations and returns. Understanding this, plan sponsors must be aware of their fiduciary responsibilities, and be conscious of how much information they will provide. Says Reish of this problem, “I think that the single most important decision a participant can make is how much to defer, period.” To help them make this decision and, he suggested plan sponsors automatically enroll participants at 5 or 6% and increase that rate by at least 1% every year – up to 15% – and that those deferrals should be invested in Qualified Default Investment Alternatives (QDIAs). They should offer their participants annual updates to let them know where they stand, whether ahead of or behind where they would like to be, and present options should participants want to make any changes.
hopes to see a shift in how firms guide their clients to find plans and in the plans themselves. While he supports QDIAs as a means to correct poor investment allocations in qualified plans. Davis also hopes firms will focus first on finding acceptable target maturity funds before pursuing recordkeeping solutions. If that approach comes to fruition, the resulting re-ordering within the plan-selection process, he says, is likely to "rock the world" for many involved in this business.
Barry implied that this shift has already begun, saying, "Everybody is still struggling through the QDIAs." Beyond that, however, he presented the complications of fund-menu construction, including its organization and current and future legal difficulties. Just as providers must be conscious of the funds they offer, clients rely on comprehensive and informative "menus" to help them make their decision.
Reish noted that plan sponsors must be assured of the ability of 401(k) plans - particularly in view of the dwindling availability of traditional defined benefit plans - to provide adequate retirement savings for participants. Barry asked if it was possible that dissatisfaction with the current system could lead to the development of a generic process in which investors' only options are target maturity funds dominated by passive funds? There are (questionably realistic) fears that if full disclosure of 401(k) fees is made mandatory, the information would prove so frustrating to plan sponsors that they would cancel plans, effectively preventing many Americans from having adequate retirement plans. Plan sponsors should be aware of these questions, and how they might respond to them, in order to successfully navigate the challenges the coming months will present, Barry says.
When one audience member wondered exactly what was so wrong about a default plan, it became apparent that the greatest roadblock is an employer's lack of involvement; Barry claimed that if employers stand to gain nothing from a plan's success, and fear being sued, they will look to lawyers - instead of professional investment advisors - for guidance. Rather than try to benefit their employees, they would seek to protect themselves against potential lawsuits.
An Invented Notion?
However, those precautions are unnecessary as the threat of getting sued is an "invented notion," says Barry, and only really serve to limit employee benefits. Reish agreed, saying that from an investment and risk-management perspective, "I'm a great fan of defaulting participants into any one of the three QDIAs," and he went on to list as options "a target-date fund or something similar, a risk-based lifestyle fund or a balanced fund, or a managed account." Both Reish and Davis agreed that if a company selected a capable investment manager, as long as he allocated assets properly and invested well, both the employer and participants would benefit from this arrangement.
Some employees, especially those in low-paying positions, might resist higher deferral rates, preferring to focus on current expenses - such as the rising cost of gas - than future savings, and they certainly have the ability to not invest in a 401(k) if they so choose. If employers want to help those people, as well as themselves, they should address anyone with reservations, be sympathetic to their needs and concerns, but also take care to deliver the message convincingly and let them know that a default plan can be mutually advantageous. Barry cautioned that employers should, however, take care not to allow more than one outstanding loan at a time, and to generally discourage loans within their plans.
If employers provide adequate plans, with attention to their clients' annual concerns and advice from a professional investment manager, they should see high participation rates and high deferral rates among their employees. With these and disclosure concerns addressed, the final situation will be, as Davis says, "win-win-win for everybody."
- Sara Kelly