Opinions January 10, 2014

403(b) Plan Checklist of Best Practices for Plan Sponsors

January 10, 2014 (PLANSPONSOR.com) - A good New Year’s resolution regarding your 403(b) plan is to resist the tendency to “set it and forget it.”
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With the issuance of final Internal Revenue Code §403(b) regulations in 2007 and expanded Department of Labor (DOL) annual reporting requirements, nonprofit plan sponsors are required to exercise more oversight and control over their 403(b) plans than ever before.

Great-West Financial has assembled a checklist of suggested “best practices” to assist you in fulfilling your fiduciary responsibilities and helping participants achieve a higher level of retirement readiness. Only you, as the plan’s fiduciary, can determine the best options and practices for your plan. You may wish to consult your tax and/or legal counsel.

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Here are some practices you might consider:

Identify all employees and third parties who work on the plan. Identify which are fiduciaries and provide training to ensure they understand their basic responsibilities:

o   Adhere to the exclusive benefit rule to avoid conflicts of interest. Make all plan decisions in the best interest of participants. Ensure fees are reasonable.

o   Satisfy the prudent person standard. Develop prudent processes for operating the plan.

o   Comply with plan documents. They’re your manual for administering the plan.

o   Establish prudent processes for the selection and diversification of investments.

o   Prudently select and monitor your service providers and the fees charged.

Hold regular meetings to review plan administration:

o   Keep the written plan document in compliance with all applicable laws and regulations.

o   Read your document thoroughly and often and understand each provision.

o   Pay particular attention to requirements specific to 403(b) plans, such as universal availability and age 50 catch-up provisions. 

o   Review plan policies, procedures and forms to ensure compliance to plan terms.

o   If you have multiple providers, your fiduciary duties and potential risks are multiplied, so meet regularly with each one to monitor their services and fees.

Consider implementing plan design features to increase participant retirement readiness: 

o   Add automatic enrollment or increase the initial deferral rate.

o   Add automatic deferral increases annually.

o   Add or revamp employer contributions to foster increased elective deferrals.

o   Consider whether offering Roth contributions and the new in-plan Roth rollovers would benefit your participants.

o   Limit the number of plan loans that can be outstanding.

o   Re-enroll all participants into a Qualified Default Investment Alternative.

o   Add a guaranteed lifetime income distribution option.

Provide additional participant communications and guidance:

o   If your plan is subject to the Employee Retirement Income Security Act (ERISA), comply with all communications requirements, including the DOL’s fee disclosure requirements. These can also serve as a best practice if your plan is exempt from ERISA.

o   Provide access to robust websites with retirement readiness calculators and other tools.

o   Consider reducing your fiduciary liability for participant investment decisions by following the communication requirements in ERISA §404(c).

o   Consider offering investment advice or managed accounts through your plan.

Develop and maintain prudent investment policies:

o   Regularly review your Investment Policy Statement (IPS) or develop one to define your criteria and processes for the selection, monitoring and de-selection of investments.

o   If you have multiple providers, apply the IPS to each investment lineup.

o   If you have legacy carriers, ensure that proper information sharing agreements are in place to facilitate completion of Form 5500.

Simplify: 

o   Achieve greater control and flexibility, improve participation, simplify participant communication and education, significantly reduce participant costs and lessen your potential fiduciary risk by scaling down to a single recordkeeper.

o   Review all legacy 403(b) contracts and investments to identify those that are portable or may be liquidated.

Document:

o   Keep good records of all plan-related decisions.

o   Highlight the prudent decision-making processes you used when selecting and monitoring investments and service providers and making changes.

Resolve to maximize the value of your 403(b) plan in 2014.  Best practices like these can help ensure your plan is compliant with all applicable laws and regulations, that you fulfill your fiduciary responsibilities to the plan and its participants, and that your participants get the resources necessary to make informed savings and investment decisions.  

Barbara Lewis, Vice President, National Accounts for Defined Contribution Markets at Great-West Financial 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Benefits January 9, 2014

At Distribution Time, What Do Participants Do?

January 9, 2014 (PLANSPONSOR.com) –  Examining how participants decide to leave an employer’s plan after separating and when they begin taking distributions can help plan sponsors decide whether to use “to” or “through” target-date funds (TDFs).
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As defined contribution (DC) plans have begun dominating the private-sector retirement plan landscape, plan sponsors and providers are increasingly interested in the distribution decisions of older participants when they stop working. These decisions can help address a key question, according to “Retirement Distribution Decisions Among DC Plan Participants,” a paper from the Vanguard Center for Retirement Research.

Should plan sponsors base the glide path of a TDF on an approach that takes the participant “to” or “through” retirement? The former would suggest a more conservative glide path, assuming assets are used immediately upon retirement. The latter points to an investment strategy that recognizes that assets are generally preserved for several years post-retirement.

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“You lose your participant identifier when participants leave the plan, but we know that once [participant balances are] in the IRAs, they generally don’t come out until the required minimum distributions,” says Jean Young, senior research analyst at Vanguard’s Center for Retirement Research and a co-author of the paper.  “That’s part of the overall analysis,” Young tells PLANSPONSOR. “We looked at this large population of participants, and mostly they roll over to individual retirement accounts (IRAs). It’s not a matter of small or large balances, but a behavior that’s pretty consistent. People are not taking money out until the distribution is required.”

But the simple fact of withdrawing the money does not necessarily mean it’s being spent, Young says. Some of it is saved in a bank account or in a different vehicle instead of being consumed in rent, groceries or cars.

Since the assets are not being used for several years, the research shows, people have a longer time horizon. In order to preserve assets through retirement, the equity allocation is 50% at the year of retirement and between the ages of 65 and 72 it goes down to  a final equity allocation of 30% at seven years past the actual age of retirement. “You invest to retain assets longer,” Young says, “so that suggests a ‘through’ approach instead of a ‘to’ approach.”

Market Is Not a Motivator

The Great Recession and more recent financial market volatility appear to have had little impact on the distribution decisions made by retirement-age plan participants, according to the paper, which updates analysis from 2010, taking it through the end of 2012.

Young emphasizes that the research includes older participants who terminated service in 2008 and 2009, years marked by a global financial crisis and a severe decline in stock prices. Surprisingly, the behavior of retirement-age participants was similar to that of both earlier- and later-year groups. Charting in-plan behavior over the years 2004 through 2011, Vanguard found the participants in each year follow a startlingly similar curve.

“There is not much difference in plan-exiting behavior,” Young says. "Even through a variety of economic environments, the behaviors are remarkably similar.”  

Other findings from the paper include:

  • Preserving assets. Seven in 10 retirement-age participants (defined as those age 60 and older terminating from a DC plan) have preserved their savings in a tax-deferred account after five calendar years. In total, nine in 10 retirement dollars are preserved, either in an IRA or employer plan account.
  • Cash-out of smaller balances. The three in 10 retirement-age participants who cashed out from their employer plan over five years typically hold smaller balances. The average amount cashed out is approximately $20,000, whereas participants preserving assets have average balances ranging from $150,000 to $225,000, depending on the year of termination cohort.
  • In-plan behavior. Only about one-fifth of retirement-age participants and one-fifth of assets remain in the employer plan after five calendar years following the year of termination. In other words, most retirement-age participants and their plan assets leave the employer-sponsored qualified plan system over time. Only 10% of plans allow terminated participants to take ad hoc partial distributions. However, about 50% more participants and assets remain in the employer plan when ad hoc partial distributions are allowed.

 

Knowledge Gap?

Young says she finds it a little surprising that more individuals don’t stay in the plan and take advantage of the lower cost of investments negotiated by employers compared with the prices they pay as direct retail investors. Some people want to simplify their financial lives and consolidate accounts, she says, or some people do not understand the expense structure of how they pay for investments. “I guess it’s a knowledge gap,” she says.

The data in the analysis is from Vanguard’s DC recordkeeping clients over the period January 1, 2004, through December 31, 2012. Analysts examined the plan distribution behavior of 266,900 participants age 60 and older who terminated employment in calendar years 2004 through 2011. The average account balance of participants ranged from $106,800 to $149,400, depending on the year of termination. About half the participants had account balances less than $50,000, depending on the year of termination. Three in 10 retirement-age participants had worked for the plan sponsor fewer than 10 years, a factor affecting the number of smaller balances, since account balances rise with tenure. About 45% of retirement-age participants had 20 years or more of job tenure. These longer-tenured participants had average account balances of about $190,000.

“Retirement Distribution Decisions Among DC Plan Participants” can be downloaded from the Vanguard Center for Retirement Research website. 

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