Regulations, Work Force Changes Challenge Plan Sponsors

Plan sponsors surveyed by Buck Consultants identified the creation of 401(k) plans as having the most significant effect on employers who sponsor defined contribution plans.

Survey respondents identified the Pension Protection Act of 2006 as having the most impact over the last 40 years on defined benefit plan sponsors. The two runners up were volatility exposed by increased accounting transparency, and demographic changes in the workforce—such as fewer long-term workers.

Apart from the statutory changes to the Employee Retirement Income Security Act (ERISA), respondents to the survey—fielded for the last in a series of articles from Buck commemorating the 40th anniversary of ERISA—noted other changes in the 40 years since ERISA was enacted that directly and indirectly impact employee retirement benefits. These include such trends as increased employee turnover and the decline of “career” employees, as well as a graying work force that might not be able to retire because they have not saved enough.

Several plan sponsors expressed particular concern with increased employee turnover and the increasing prevalence of defined contribution retirement plans. In particular, they worried that workers are far too tempted to cash out retirement savings each time they leave an employer. Some also lamented the decline of defined benefit retirement plans and expressed concern that some participants still are not prepared to successfully navigate defined contribution plans—particularly in terms of investment selection and monitoring.

The top challenges faced by plan sponsors in the survey were administrative complexity, designing effective employee communications, and balancing the needs of large, diverse work forces. Frustration with regulatory complexity was expressed repeatedly by survey participants. One participant even suggested that tax preferences for employee benefits be eliminated—observing that without the tax preferences, there wouldn’t be “so many rules to get in the way!”

However, asked what would happen if the favorable tax rules for employer provided retirement and health coverage were repealed, survey respondents overall predicted that employers would drop both types of benefits, and, for those employers that retained plans, that fewer employees would participate. Some expressed concern that employers would drop plans without a corresponding increase in cash wages—leading to decreased retirement savings.

Asked what one thing they would change about retirement plans or regulations, respondents cited nondiscrimination requirements and better education, advice and modeling tools that would enable participants to understand the long-term implications of savings decisions.

Some plan sponsors wished for a reinvigorated defined benefit pension system, and some wished for an end to lump-sum distributions from retirement plans, as well as retirement and health coverage offerings designed and sponsored by the federal government—as opposed to our employer-based system that exists today.

Also on the wish list for improvements to defined contribution plans was the ability to buy chunks of an annuity as an investment choice.

Plan sponsors expressed concern about retirement readiness and its impact on managing a workforce, with one survey respondent saying, “Folks who do not save enough and cannot afford to retire [make it] hard to manage employee attrition. ERISA needs to be better in getting people to transition into retirement.”

Buck Consultants fielded the survey in August and September 2014, among approximately 40 plan sponsors.