Using Trends to Improve Your Plan

September 17, 2014 ( - Plan sponsors can use data about industry trends to make improvements to their retirement plans.

For example, according to Michael Kozemchak, managing director at Institutional Investment Consulting (IIC), plan sponsors traditionally might have done fee benchmarking for their plans every three to five years and requests for proposals (RFPs) for recordkeepers every five years or more. But, in part due to fee disclosure rules, the trend is emerging to do fee benchmarking every year, and his firm tells clients to issue RFPs for recordkeepers every five years, no exceptions.

Kozemchak, speaking to attendees at the Plan Sponsor Council of America (PSCA) 2014 Annual Conference, also said lessons from well-known fee litigation are guiding plan sponsors regarding what to do about fees.

One of Kozemchak’s clients, Karen Hollis, director of compensation and benefits at CGB Enterprises and Zen-Noh Grain Corporation, CGB’s parent company, said they enlisted IIC to help them benchmark their plan and issue an RFP in 2012, and they were surprised at the new technology. The firms had used their previous recordkeeper for 20 years. “There were things we didn’t want to do anymore that recordkeepers could handle, such as qualified domestic relation orders [QDRO] processing,” she said.

The RFP process led Hollis’ employer to choose a new provider for its defined contribution (DC) plan, securing a long-term fee guarantee and fixed fees in the process. The firm also entered into a fixed-fee arrangement with adviser IIC.

Kozemchak explained that a fixed-fee arrangement could be a per participant charge. By comparison, a fee arrangement that is based on plan assets results in higher fees as contributions and market interest are added to the plan. By switching to a per participant fee, CGB cut total expenses from 80 basis points (BPS) in 2012 to 29 basis points in 2014. Recordkeeping expenses were cut from 38 basis points to 12.

About the RFP process, Kozemchak said, “You will derive more competitive terms and expenses when there are more providers involved. And, absent someone to help, you will end up speaking with a provider’s relationship manager, who is limited in how he can help you reduce expenses.”

Hollis said now her employer plans to benchmark consultant fees annually, benchmark recordkeeping fees regularly and renegotiate as necessary.

Due to fee disclosure rules and litigation, more plans are moving away from embedded fees, or revenue sharing, Kozemchak pointed out, but the marketplace has not caught up yet. However, he believes that within the next 36 months, providers will eliminate all embedded revenue, and sooner than that, recordkeepers’ technology will be able to track what recaptured fees are really owed to each participant.

According to Hollis, CGB set up a plan reimbursement account to capture revenue sharing, and also asked the new recordkeeper to allocate plan costs in the same manner that the plan incurred costs—per participant.

There are also investment trends to consider for improving plan design, Kozemchak said; for example, reviewing target-date funds (TDFs), the active versus passive fund debate, expanding to alternative investments, a new look at fixed-income fund options and updating the investment policy statement (IPS).  He further explained that firms are looking into customized target-date fund solutions to better meet participant needs and the firms’ fiduciary responsibilities. The focus on fees is leading firms to consider lower-cost options, such as index funds instead of actively managed funds, or collective investment trusts (CITs). Firms are also considering adding non-traditional investments like real assets and Treasury inflation-protected securities (TIPS) to improve diversification and manage volatility.

One thing CGB noticed when evaluating its target-date funds is that some participants were using more than one. It initiated an education campaign, which resulted in a 36% decrease in the number of participants who were doing so.

CGB and Zen-Noh also decided to update their IPS, and used a template available from the PSCA. Kozemchak warned attendees that if they decide to use a template offered by some industry group or provider, they still need to review it to make sure they are only promising something they will really follow through with.

Certain plan design trends in the industry also led CGB and Zen-Noh to make changes to their plans. Hollis said her employer implemented automatic enrollment and auto-enrolled everyone who was deferring less than 6% of pay at a 6% deferral rate. In addition, participants’ deferrals are automatically increased annually by 2%, up to 10%. As a result, CGB’s average deferral rate increased from 7.07% in 2012 to 10.2% in 2014. The average participation rate is 91.2%. The firms also decided to reduce the number of loans allowed by participants to one outstanding at a time.

“Looking at plan design trends helped CGB think more outside of the box,” Kozemchak noted.

Looking at regulatory trends also led CGB and Zen-Noh to make some changes. They updated all documents, policies and checklists, assigned responsibility for making sure all were followed, started documenting decisions and meetings, went through a self-audit/self-correct process and conducted fiduciary training for plan committee members.

As a closing thought, Kozemchak quoted fee suit litigator Jerry Schlichter’s interview with PLANSPONSOR: “At the end of the day, you’re handling other peoples’ money, your employees’ money, and the duty of anyone handling anyone else’s money is a very strict fiduciary duty.”