As a plan sponsor, both Sections 408(b)(2) and 404(a)5 of the Employee Retirement Income Security Act (ERISA) help guide the approach to fees. With these regulations in mind, sponsors have likely formed a formal process to ensure fees are reasonable, and that the services received for those fees represent a good value, noted James Nichols, head of advice and strategy services at Voya Financial, at the 10th Annual PLANSPONSOR National Conference in Chicago.
But with such a rapidly evolving retirement landscape, how can plan sponsors be sure their fees truly remain reasonable and defensible in the case of a participant lawsuit or a challenge from the Department of Labor (DOL)?
For the answer, plan sponsors can look again at ERISA, Nichols said, and what that oft-cited acronym is really talking about—retirement income security and true retirement readiness. He pointed out that, as an industry, “we’ve spent decades looking at the accumulation side, but equally important is what participants do with those savings when they finally reach their retirement date.” Getting participants successfully to the retirement date is a core purpose of most, if not all, retirement plans, so surely retirement readiness metrics will inform the fee reasonableness conversation.
Historically, the majority of plan sponsors, if asked, would report that the goal of their plan was getting participants to a “secure retirement.” Until recently, though, few had measures of retirement readiness in place to determine how many of their participants were on track to reach the secure retirement target, noted Laura McKinnon, a managing director at BlackRock. Without these insights, it’s much harder to say for certain that fees are reasonable and defensible.NEXT: Influencing participant behavior
When it comes to influencing participant behavior and developing the patterns of habitual saving required for plan success, Nichols said, it can be particularly difficult to bring about change if you do not have a meaningful communications strategy in place.
To him, retirement success means being on track to have the confidence and resources you need to fund your lifestyle in retirement. “On track” depends on more than the size of one’s 401(k) balance, he noted, and comprehensive financial wellness is necessary to support an individual’s confidence. Support could touch on topics such as debt, savings and other wealth management concerns that all affect retirement security. To boost participants’ confidence and willingness to participate wholeheartedly in a plan, sponsors must make them aware of their options and of the tools at their disposal as they approach their retirement date.
McKinnon agreed, saying that a first step is to emphasize for participants that the plan is truly a benefit, and one which is easier to use effectively than they might expect.
Beyond the participation and deferral rates, she suggested benchmarking retirement engagement is also critical. Equally important: How much annualized income can participants expect at retirement? Does an employee’s tenure factor into his individualized projections? If not, sponsors may want to reconsider what variables they use in success calculations, and what participants need to hear to make that data meaningful to them. Breaking it all down into participant-level data to see what risks participants are really facing can drive engagement, she said, and can help inform which proprietary or customize solutions can meet participant needs.
NEXT: What savings mean to participants
Nichols said his firm has found success boosting engagement by highlighting each individual participant’s projected retirement income on the home page of its participant website. Plan sponsors have to educate participants about what that number really represents, he warns, and they should also periodically rethink how they approach those calculations. “What variables—age, gender, position, outside savings—do you account for?” he asked, “and does your plan design start in the right place to meet the obstacles and opportunities unique to each?”
For instance, McKinnon noted, target-date funds (TDFs) are having success getting Millennial investors engaged in the retirement system post-Pension Protection Act (PPA). Baby Boomers benefit from these funds, too, she said, but many are also supported by pension plans in addition to a defined contribution (DC) option. This implies a simple age-based determination of risk tolerance for Boomers that does not factor in assets from outside the DC plan could leave Boomers with sub-optimal risk exposure.
Gen Xers are the “middle child” of the retirement savings world, McKinnon said. There is a dip in the level of preparedness she sees among 40-somethings, in part because Gen Xers were enrolled when default deferral rates, if they were in place, fell far short of what is standard today. This means Gen Xers may need more risk taking than a simple age-based calculation would imply
“Six is the new three,” she added, referring to common automatic participant contribution rates. To jumpstart deferrals, she said, sponsors should find out what their participants need to hear today to justify budgeting for their future selves. The best results come when sponsors adopt the full spectrum of automatic features, Nichols said. “We need 100% personal financial engagement,” he added.
Finally support from your CEO and chief financial officer (CFO) is critical to implementing retirement readiness solutions, McKinnon said, adding that “CFOs and CEOs are going to be very numbers-oriented.” Quantify the impact your plan can expect from adding the new features, and use data to get them on board. “The numbers are astounding, because it’s all compounded and it’s all over time.”
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