Administration March 4, 2021

A Checklist for Retirement Plan Committees

Experts discuss what main facets of a retirement plan that a committee should cover in its quarterly meetings.
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Art by Enzo Pérès-Labourdette

Given that there are so many considerations to weigh when overseeing a retirement plan, it is important for plan sponsors to have a checklist for their committees—whether the sponsor has a single retirement plan committee or dual investment and administrative committees—to cover in quarterly meetings. These meetings typically last between one and two hours.

The overriding theme of retirement committee meetings should always be whether the committee is acting in the best interest of plan participants and if it is improving the plan, says Michael Webb, senior financial adviser at CAPTRUST.

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There are two main areas that retirement plan committees need to cover: settlor, or administrative, functions and fiduciary functions, says Cliff Dunteman, a partner with Francis Investment Counsel.

A best practice, and a commonsense one at that, is to circulate an agenda to the committee members beforehand, says David Klimaszewski, a partner with Culhane Meadows. At the top of the meeting, it is common for the committee to approve the minutes from the previous meeting, Klimaszewski says.

Following that, “we start off with the fiduciary functions, starting with the investments,” Dunteman says. “The investments are the fundamental action items that need to be discussed.”

Webb says it is important for the committee to discuss “if the investments are best in class and participants are utilizing them correctly.”

Dunteman continues: “Generally speaking, we first address funds that have been put on the watch list. The issues here can be both qualitative and quantitative. We’ll discuss the five P’s as they pertain to investments: philosophy, people, process, performance and price. Quantitative issues involve performance and price, and qualitative issues involve the philosophy of the management of the fund; the people, or the fund managers; and process. A committee should review performance relative to a passive index and actively managed peers. When it comes to the qualitative review, the committee will need to discuss any management strategy and/or management changes. Any time there is more than a 50% change in a management team in any one quarter, we advocate that the fund be put on the watch list.”

If there are new managers at the helm of the fund, the committee should discuss their backgrounds, Dunteman says.

“We need to find out if they have been in charge of decisionmaking previously or if this is their first time in charge of a fund, as well as how long they have been with the investment firm and the previous background,” he says. “Once you have addressed the ‘problem children’ on an investment menu, then it makes sense to talk more broadly about how the overall menu has done. As target-date funds [TDFs] garner such a large portion of plan assets, it is important for the committee to discuss the TDFs in every meeting. They need to be benchmarked relative to their main peers, those being the largest TDF providers in their category—Vanguard, T. Rowe Price, Fidelity—to gauge how they are performing, net of fees. The committee also needs to explore whether there were any changes made to the glide path tactically or strategically that might affect performance, and how those changes compare to changes by other TDF managers.”

Following that, Dunteman says, “The committee can look at the entire investment menu as a ‘batting average.’ Because there is so much focus today from an excessive fee litigation perspective, you want to understand how your ‘non-problem children’ are performing, net of fees, relative to passive indexes. This is called the ‘batting average’: the percentage of the funds outperforming their benchmarks.”

Once the investments have been covered, the committee can delve into other topics, such as fiduciary training, he says.

“We have heard from the Department of Labor [DOL] and auditors that when they are doing audits, they are now asking what kind of ongoing fiduciary training a plan sponsor is providing to their committee members,” he says.

It is also critical for the committee to stay on top of any new rules or regulations. “Last year, for example, the DOL rolled out new e-delivery rules,” Dunteman says. “The fiduciaries must understand how these new processes might change how the plan interacts with participants and how their recordkeepers might implement these new rules.”

As another important example of new developments, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late 2019 and the Coronavirus Aid, Relief and Economic Security (CARES) Act last spring. If a plan adopted provisions of those acts, it would have to change its plan design and plan documents, Dunteman says. “Your checklist might incorporate plan design changes, be they temporary or on an ongoing basis,” he says.

Reviewing Participant Data

Another key area that retirement plan committees need to discuss is participant data, including changes to participation rates, average balances and deferrals; maximization of the match; utilization of Roth provisions; and loans and withdrawals, he says.

Dunteman says that because there are so many topics for a plan committee to cover, it might set a calendar agenda for its quarterly meetings. The first quarter meeting, for example, could cover annual benchmarking studies where the committee takes a look at how its participants’ utilization of the plan compares to companies of similar size or industries, he says.

The second quarter meeting could delve into fees. The committee should ask itself if the fees are reasonable and have if they have been benchmarked through industry studies, requests for proposals (RFPs) or requests for information (RFIs), Dunteman says.

The committee could discuss audit results in its third quarter meeting, he says. “Most plan sponsors we work with have an annual audit,” Dunteman says. “It is a good idea for whoever coordinates that audit to report to the retirement plan committee.”

The upcoming education plan for participants for the next year could be the centerpiece for the fourth quarter meeting, Dunteman says. The committee can rely on resources from its recordkeeper and/or its consultant for this information, he says.

Retirement plan committees also need to discuss the performance of their service providers, Klimaszewski says.

One last area for committees to cover is “making sure that the various reporting and disclosure requirements are being complied with,” says Julia Zuckerman, vice president with Segal.

And, of course, the committee must be diligent about taking detailed minutes and documenting the processes for each of its decisions, Zuckerman says, “so that if there is an issue down the line, there are details on how and why the committee reached its decision.”

Administration March 1, 2021

How to Effectively Measure Retirement Plan Success

It’s important for plan sponsors to define plan goals and what they are going to measure, and the defined metrics should be things they can influence.
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Plan sponsors might not know how to measure the success of their retirement plans.

According to Vestwell’s “2020 Retirement Trends Report,” plan advisers and sponsors use different metrics to determine the success of retirement plans. Advisers were more focused on plan participation rates (61% listed it as a top factor versus 39% of plan sponsors), while sponsors were more focused on the administrative side, citing no administration errors as their top priority 60% of the time and minimal time managing a plan 59% of the time.

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Having no operational and administrative errors is important, says John Doyle, senior retirement strategist at Capital Group, but if the plan sponsor’s goal is to attract and retain talent or get employees prepared for retirement, it’s not a success measure. “Having no operational and administrative errors should be a success measure for recordkeepers. Plan administration is separate and distinct, unless it has an impact on how participants are using the plan,” he says.

Richard Tatum, president, retirement services, at Vestwell, similarly says having no operational and administrative errors is table stakes. “Your retirement plan is meant to be a benefit and not a burden, and there are many attributes you can look for when selecting a recordkeeper to ensure a more seamless plan experience,” he says.

Doyle says one of the challenges plan sponsors have is defining the objective of the plan. There could be multiple objectives, and they could vary—from attracting and retaining talent to ensuring retirement readiness—depending on whether you ask someone in finance or someone in human resources (HR) what their goals are.

By agreeing on measures of plan success, he says, all parties have defined and agreed-upon objectives. And having measures of success can help plan sponsors determine what to do to influence outcomes. “I recommend choosing things you can actually influence through plan design and communications,” Doyle says.

“We believe that all Americans deserve access to a quality retirement plan; no one should be paying for anything where they don’t see value,” says Tatum. “Setting expectations for the success of your plan helps you evaluate whether you and your participants are getting out of it what you deserve. As such, it’s important to ascertain your version of success upfront and take the necessary steps to ensure you’re achieving those metrics year over year.”

The most commonly used measure of plan success is participation rate, and Doyle says he also recommends measuring actual deferral rates. A plan’s participation rate can be obtained from the plan’s recordkeeper and actual deferral rates can be obtained from the recordkeeper or payroll provider. According to a Defined Contribution Investment Perspectives paper from Capital Group, co-authored by Doyle, plan sponsors can look at the average deferral rate by age cohort, tenure and compensation. They should also determine how many participants fall below the goal percentage.

He says plan sponsors can use the average for their industry as a benchmark for participation rate or deferral rates; however, each plan sponsor could set its own objective. “If a plan sponsor’s goal is 96% participation or 15% deferral rates, the industry benchmark shouldn’t influence that; the measure would be how close the sponsor is to its goal,” Doyle says.

Doyle also recommends measuring participants’ personalized rate of return. “How participants invest is going to impact retirement outcomes, but even if your plan has the best investments, if participants don’t know how to use them or are using them incorrectly, they may not be succeeding,” he says.

He says plan sponsors should use the plan’s qualified default investment alternative (QDIA) as the benchmark. “Participants should have results comparable to those of the plan’s QDIA,” the Capital Group paper says. Doyle says plan sponsors can determine this by comparing the personalized rate of return for participants who manage their investments themselves with the rate of return of the QDIA. “This would come from the plan’s recordkeeper,” he says. “Most recordkeepers put personalized rates of return on statements, and there are a few that roll it up on a plan basis.”

If plan sponsors can’t get personalized rates of return, they can measure how many participants are diversified in their investments. However, Doyle warns that some plan sponsors think that since the QDIA is diversified, the more participants that are in the QDIA, the more successful the plan will be, but this is not a full measure of success.

He says these three metrics—participation rate, deferral rates and personalized rates of return—will impact plan participants’ retirement readiness and each is something plan sponsors can influence.

Tatum says most plan advisers will hold themselves accountable to hitting certain benchmarks, including plan participation rates, savings rates and satisfaction rates. He says he believes participant retirement readiness is the most important metric of success. “It’s a critical measure of success because ensuring your participants are preparing for a secure future should be a driving factor of any plan. While tax benefits, recruiting strategies and owner benefits often play a role, at the end of the day, this is about supporting employees and making sure they can comfortably transition away from the working world in their later years,” Tatum says.

Plan advisers typically report participants’ retirement readiness to plan sponsors based on income replacement ratios as well as appropriate investment portfolios, Tatum says. He adds that retirement readiness metrics differ by participant based on how much income they need to live at or near their current level of comfort.  

But Doyle says retirement readiness might not be an effective measure for a plan. “Retirement readiness is difficult to measure because plan sponsors don’t have all the data they need,” he explains. “If there are tools which collect data about other savings or in which participants input other savings, they can come up with a more accurate calculation. However, if someone has been in the plan only five years, it’s hard to extrapolate that into retirement readiness. Retirement readiness is important as a goal, but it’s difficult to measure.”

Tatum says managed account solutions can offer participants “incredibly well-defined metrics on retirement income.”

Doyle says he also sees average account balance often used as a measure of plan success, but it’s not relevant. “Often, account balance is a factor of how long the participant has been employed, and it doesn’t take into account other assets the participant may have,” he says.

Participation rate, deferral rates and personalized rates of return should be looked at on an annual basis so plan sponsors can put communications or plan design features in place if they want to influence one of those factors, Doyle says.

However, Tatum recommends that metrics should be looked at more often than once a year. “Most of our adviser partners are continually monitoring plan metrics so that they can make any necessary adjustments throughout the year in order to hit annual benchmarks,” he says. “At a minimum, plan sponsors should be taking a quarterly snapshot and working with their adviser to identify strategies to increase engagement.”

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