What Advisers Would Like Plan Sponsors to Better Understand

Retirement plan sponsors need to be knowledgeable about their investment lineups and deliver documentation to the Department of Labor (DOL) and IRS on time. Most retirement plan committee members already know this.

However, there are some things that advisers and consultants wish their sponsor clients were better at, or that they prioritized more.

“The No. 1 thing is being aware of their role as a fiduciary,” says Craig Eissler, wealth adviser with Halbert Hargrove. “Many plan administrators may believe that hiring advisers and third-party administrators [TPAs] will entirely remove them from all liability and decisionmaking.

“The fact of the matter,” Eissler continues, is that plan sponsors “inherently act as stewards [that] create the retirement plan. The investment committee members are charged with overseeing the portfolio, and other administrators are involved in ensuring the plan runs smoothly. Even with the use of service professionals, plan sponsor fiduciaries are still ultimately responsible for showing prudence in the active management of the plan.”

Smarter Automatic Features

Recently, more plans have upped their default deferral rates for automatic enrollment from 3% or 4% to 6%. Some are pairing that with annual automatic escalation of 1% up to ceiling caps of 10% and, in some rare cases, 15%.

Sponsors using automatic features need to be willing to listen to advisers’ recommendations on completely rethinking the deferral formula with the goal of creating better participant outcomes, John Doyle, senior vice president, senior retirement strategist at Capital Group, tells PLANSPONSOR. It starts with plan sponsors accepting the notion that they require some external entity (i.e., the adviser, retirement specialist or consultant) to help them with this process.

“The way to solve the problem is to change the way plans are designed, in such a fashion that plan participants can achieve good outcomes without having to know why,” Doyle says. “I don’t see any evidence that we are any better at this than several years ago.”

Plan design automation needs to be rethought and adjusted to make retirement plan participants more financially secure, Doyle says. Simply put, that means better auto-enrollment and even re-enrollment, he says.

In line with this, David Swallow, managing director, consulting relations and retention at TIAA, hears from advisers that one thing they would like sponsors to better understand is the “importance of the documentation of their actions, as it relates to the plan and the retention of records. How a retirement plan is ultimately judged comes down to process. Documentation supports the process you went through in making your decisions.”

He says sponsors should “spend a little bit more time to understand how important and critical [documentation] is.”

Defining Success and Plan Goals

Another top-line objective for sponsors is defining success, Eissler says. There is sometimes a disconnect between what plan sponsors and advisers think the plan’s priority, or definition of success, should be.

“Plan sponsors typically have their own definition of a successful plan,” Eissler says. “Ideally, success would depend on what objectives an employer has when establishing the plan” and what responsibilities it is willing to take on, he explains.

“They [plan sponsors] typically will prioritize passing annual compliance tests, ease of plan administration, low costs and getting competitive investment returns,” Eissler says. “While these are all desirable outcomes, what often can be overlooked is emphasizing high participation rates and, ultimately, sufficient contributions into the plan to ensure a financially secure retirement for participants. Pertinent employee education and straightforward plan investment options can often help accomplish these priorities.”

A big misconception is that low cost is better for investment options, says Ken Innis, chairman of R.O.W. Group, a wealth transfer firm.

“We have seen the perspective that investing in low-cost index funds leads to higher accumulation and a large pot of money at retirement,” Innis says. “The flip side of that is, we think low-cost investments should be part of a diversified lineup, but they don’t always translate into better performance.”

In putting together an investment lineup, a sponsor needs to work with the plan’s adviser to ask, “‘What is active investment management trying to accomplish?’” Innis says. “We think a combination of them [active and passive investing], even lifetime income options” is the way to go.

R.O.W. is not of the opinion that a 4% drawdown strategy for retirees is appropriate for every participant, he adds. “For 69% of workers, guaranteed money is one of their top goals,” Innis says, which is why R.O.W. thinks lifetime income options should be offered in the plan, even to young workers. This way, younger workers can contribute to the lifetime income options over the course of their careers and not have to go through the difficult decision of whether to place their bets on an annuity when they reach retirement age.

Sponsors also need to listen to their advisers’—and recordkeepers’—updates on legislation and regulation, sources agree.

In sum, Eissler says, “When you actually step back and review all that is involved in establishing, managing and monitoring a qualified plan, it is little wonder that there’s such a critical need for experienced, trained retirement professionals. While there are a multitude of common mistakes made when administering a plan, at a high level, implementing an ongoing review process is a critical best practice that would serve plan sponsors well. This process would include mapping out review meetings, maintaining minutes, documenting key retirement plan management decisions and regular review of investment policy statements [IPS], as well as continuous monitoring of service provider fees and services.”