Data and Research December 6, 2017

Government Employers Want More Provider Education to Boost Participation

A Lincoln Financial Group study revealed little participation rates in governmental defined contribution plans, compared to 401(k) and 403(b) plans.

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A recent study by Lincoln Financial Group revealed key changes plan sponsors working in the government sector are hoping to see from their service providers.  

The study, which surveyed 4,100 plan sponsors, reports employers are pressing for better technology, advanced plan designs and personalized service from providers, in order to raise participation among workers.

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Government plan sponsors want more focus on communication and increased participation rates, because ultimately they want to help their employees save for retirement,” says Gregg Holgate, head of institutional services at Lincoln Financial Group. “For providers, consultants and advisers, these are actionable insights that will help better serve the government market.”

While most government employers (53%) offer defined contribution (DC) plans to their employees, only slightly more than half (56%) of those plan sponsors believe they are successful in aiding a worker’s retirement savings. Furthermore, the study discovered participation rates in DC plans offered by a government employer are much lower compared to 401(k) plans, with only a 44% participation rate found in government plans compared to 82% in 401(k).

More specifically, across the board, participation and deferral rates fared far lower than in 401(k) and 403(b) plans. A participation rate of 38% and a deferral rate of 2% was found on the counties level; special tax authorities saw a 43% participation rate and a 3% deferral rate; and the federal/state level had a 42% participation rate and a 3% deferral rate; among others.

And although 93% of sponsors are dissatisfied with these low rates of participation among employees, according to the survey, another 93% of employers are unhappy with the service and communication received from plan providers. Fifty-percent of sponsors believe employee communication is the answer to meet retirement goals, according to the study, yet only 10% of consultants and 20% of providers emphasize communication. Seventy-five percent of consultants, along with 65% of providers were found to pay more attention to investments and administration. Only 14% of sponsors indicated investments and administration as a need to reach their goals in the survey.

Across the board, over 90% of all government levels consider one-on-one guidance and employee communication as most effective. These rates include 94% of employers on the counties level; 92% of federal/state plan sponsors; 95% of higher-education/public hospitals; 92% of cities; and more.

More information on the study can be found here.

Compliance December 6, 2017

CenturyLink Faces ERISA Lawsuit on Custom Large Cap Fund Design

The complaint seeks to state a claim—without relying on hindsight—by arguing the underperformance of a large cap fund was “virtually guaranteed because it contained a serious design flaw from inception.”

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The latest Employee Retirement Income Security Act (ERISA) lawsuit, emerging from the U.S. District Court for the District of Colorado, targets CenturyLink for alleged mismanagement of an active large cap U.S. stock fund offered to defined contribution plan participants.

By way of background, in 2011, CenturyLink appointed its subsidiary CenturyLink Investment Management (CIM) as its retirement plan investment fiduciary. In 2012, CIM formed the CenturyLink, Inc. Defined Contribution Plan Master Trust and merged the assets of its two 401(k) plans into the master trust. According to the text of the complaint, through the master trust, CIM then reestablished the investment options for the plan considered here, including a number of custom funds designed by CIM.

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The complaint seeks certification of a class consisting of the participants and beneficiaries of the CenturyLink Dollars & Sense 401(k) Plan invested in such a custom menu option, called the “Active Large Cap U.S. Stock Fund.”

In their compliant, plaintiffs suggest the objective of the large cap fund was to “exceed the return of a broad market index of the largest 1,000 companies using an actively managed multi-manager approach.” According to the complaint, CenturyLink hired six different investment firms to manage the large cap fund, and the fund has consistently underperformed its benchmark index, the Russell 1000 Stock Index. The underperformance, plaintiffs allege, exceeded two percentage points or more each year since the investment option was formed in 2012.

The complaint seeks to state a claim—without relying on hindsight—by arguing the underperformance of the large cap fund was “virtually guaranteed” because it contained a serious design flaw from inception.

“This design flaw was built-in by [CenturyLink] by using six different fund managers with the same mandate (five active and one passive),” the complaint states. “The odds of the five active managers outperforming the market in aggregate was highly remote due to the efficiency of the large cap domestic equity market and the difficulty of even one manager outperforming for more than a year … Because of the highly efficient nature of the large cap domestic equity market, companies are generally fairly valued and excess returns are hard to produce over time. Furthermore, the five active managers would inevitably take competing positions and cancel out each other’s strategy. Effectively, the fund managers will be trading stocks among themselves as one manager overweights a stock that another manager chooses to underweight.”

In such an efficient market, plaintiffs argue, it was unreasonable for plan fiduciaries to expect five active managers to outperform in aggregate.

“Indeed, even in an optimistic scenario, it would have only been reasonable to assume the strategy would effectively turn the actively managed large cap fund into an expensive large cap domestic index fund,” plaintiffs suggest. “This also would have been unreasonable given the existence of the ‘U.S. Stock Index Fund,’ a fund heavily weighted to large cap equities, as a plan option.”

The impact of the underperformance of the large cap fund, according to plaintiffs, was magnified by CIM’s other investment option choices. The large cap fund “was one of only three stock funds offered by the plan and the only large cap stock investment option. Moreover, the large cap fund comprised up to 16% of the underlying investments in each of the target-date funds offered by the plan, which reduced the performance of those funds as well.”

The complaint concludes, as an investment professional, “CIM knew or should have known that the large cap fund’s design was flawed and underperforming. The plan fiduciaries breached their duty of prudence by failing to replace or restructure the large cap fund for five years despite its poor design and performance.”

The full text of the compliant is available here.

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