Administration February 20, 2019

DC Plan Averages Don’t Tell the Whole Story

It’s important to know how different employee groups are benefitting from a defined contribution (DC) plan so unique issues can be addressed.
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Art by Katherine Streeter

Most defined contribution (DC) plan sponsors measure their retirement plan’s success using total average participation rates and deferral rates, but this may mask issues certain employee groups are having that need to be addressed.

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Instead of equating overall average rates to the eligible employee population, plan sponsors should drill down to statistics by certain demographics, including generation, life stage, and employee position. Approaching retirement planning across general, overall statistics not only disregards possible intricate problems within the plan, it can skew the actual rates, says Marc Howell, vice president, head of Custom Retirement Solutions & Intellectual Capital at Prudential. Participants with large account balances, for example, can skew the average significantly higher than the reality for certain participants, he says.

Additionally, if plan sponsors exclude eligible, nonparticipating workers from certain statistics, such as average deferral rate or average account balance, this presents an inaccurate picture, he says.

“If you look at the mean account balance of DC plan participants, it might look very good, but if you were to include nonparticipants, it’ll give you a bit of a sense on what’s going on underneath the plan,” Howell adds. Addressing nonparticipants is important to overall workforce retirement readiness.

Drilling down by different demographics

Not all DC plan participants fit into one broad category, says Doron Scharf, senior vice president and consulting actuary at Sibson Consulting. Therefore, slicing down the workforce into different cohorts—be it by salary versus hourly employee, age, job type or career stage—can give plan sponsors a greater understanding of who is benefitting from the plan and who is not.

“Often employees who are in different stages of their life are having different sets of issues, and by looking at that, you might be uncovering something that would be masked by looking at the averages,” he explains. For example, younger participants may not be deferring much or contributing at all because of student loan debt, and low-wage earners may exhibit the same behavior because they feel they cannot afford to save in the plan.

Jonathan Price, vice president with Sibson Consulting, brings up how deferral rates may change for participants in certain life stages.  “If you look at lifecycles, you notice that some participants, when they hit certain stages of life, may decrease their deferral rates,” he says. (Think late Gen Xer or early Baby Boomer now having to pay for a child’s college education.)

He tells employers to ask themselves what type of retirement readiness will these statistics promote, and how are these individuals transitioning in their decisions and behavior with the plan over time? Ultimately, individuals should improve behavior, not worsen behavior, he says.

Utilizing enhanced statistics to improve outcomes

Introducing targeted communications, and reaching out to participants with personal one-on-ones can improve behaviors and benefit both the individuals and the plan overall. Approaching the plan with a general communications strategy does little to appeal to the employee base, and little to benefit groups of workers with issues leading to poor retirement savings behaviors, according to Sharf.

“By having the advantage of specific findings by certain groups, you have an opportunity to target communications,” says Scharf. “When you dig down a little deeper, you can do better targeted communications, you have more opportunity to be holistic.”

Howell echoes a similar tune, adding that by incorporating individualized information, participants are likelier to grasp how they need to position themselves for retirement.

“Use plan design to fix for the masses. Use communication to make a significant difference for individuals,” he emphasizes. “Have those one-on-one meetings, reach out to participants, and if you can get the plan design working well for the overall population, it helps everyone avoid issues with saving for retirement.”

As participants reap the benefits of more targeted statistics and education, so does the plan sponsor. This sort of enhanced analysis enables plan sponsors to question whether their plan is entirely effective, adds Howell. Is the DC plan actually helping employees retire when they wish to do so? If not, plan sponsors have the ability to investigate and find a solution, and thus, can save the company from issues due to late retirements, such as health care cost increases and inability to hire new talent.

“The ability to go a little bit deeper than looking at total averages of the plan is an opportunity to help specific employees and in turn, improve the plan,” Price concludes.
Administration February 14, 2019

Ensuring a Clean Recordkeeper Conversion

There are steps retirement plan sponsors can take before converting to a new recordkeeper to minimize any “clean up” afterwards; however, there is always follow up to do.
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Art by Melinda Beck

When converting from one retirement plan recordkeeper to another, having the right team in place and adequately preparing beforehand can minimize the amount of “clean up” to do afterwards.

Chad Parks, chief executive officer of Ubiquity Retirement + Savings in San Francisco, says it is a good idea for plan sponsor to conduct “a mini audit of the plan before the conversion. The sponsor needs to supply the new recordkeeper with all of the plan documents, including the financial statement, prior compliance testing and annual reports. This is a good time to ensure all of these are in compliance” with Department of Labor (DOL) and IRS requirements.

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Ensuring data from the old service provider is accurate is also key, says Rick Irace, chief operating officer at Ascensus in Dresher, Pennsylvania. “The part that gets everything going and rolling is the census data,” Irace says. “That really is the most critical aspect, to ensure we have accurate, indicative information on participants—name, address, date of hire, etc.”

One of the most common glitches Irace has witnessed is with moving assets from the old recordkeeper to the new one. “Assets should be moved as efficiently as possible,” he says. “The quicker this can be done, the shorter the blackout period in which participants will not have access to their funds.”

Amy Ouellette, director of retirement services at Betterment for Business in New York, suggests, “See if there is a notice period required before assets can be moved out of funds. Some funds have a 12-month put or other contractual timeline requiring advanced notice before moving out of them.”

A plan sponsor’s experience

PolyQuest of Wilmington, North Carolina, switched from unbundled recordkeeping services from American Funds, along with a third-party administrator, to MassMutual in January 2017, says Kim Mueller, human resources manager at the manufacturer of resin products and the 2018 Plan Sponsor of the Year winner in the corporate 401(K) < $10 Million category. PolyQuest relied on a Merrill Lynch adviser from a sister company to oversee the process.

“They were a big help for us in handling the contracts, setting a timeline and creating a checklist of all of the things we needed to think about when switching over,” Mueller says. Certainly, one of the most critical aspects to the process is “mapping the funds, making sure the new recordkeeper had equivalent options and that this was communicated to the participants.”

As well, PolyQuest’s new recordkeeper, MassMutual, assigned a very competent conversion team, Mueller says. “The adviser and MassMutual handled communication with the old recordkeeper and third-party administrator, making sure [MassMutual] got all of the legal documentation needed, such as adoption agreements and transfer notices,” she says.

MassMutual assigns three key people to handle a conversion, says Ella Bevilacqua, director of client management at the firm, headquartered in Enfield, Connecticut. This includes a transition manager, a plan design consultant and a technical consultant.

“The transition manager keeps the sponsor up-to-date with a detailed timeline and conducts weekly calls with the plan sponsor to ensure they are aware of all of the moving parts and who is handling day-to-day activities,” she says. “The plan design consultant reviews current plan documents and does a deep dive into these documents to ensure all of the pieces that need to be recordkept are being done so correctly. They may suggest enhancements or updates.”

Finally, the “technical consultant helps with the data transfer,” she says. “They coordinate all of the data coming from the prior carrier to ensure it is mapped to our system accurately. They discuss with the sponsor any data that needs clarification and then do a deep-dive training with the plan sponsor to ensure they are comfortable with our website and know where to find information.”

After the conversion

Because ensuring that data is accurate is one of the most important functions of a recordkeeper conversion, “the plan sponsor needs to verify that the data is correct on the new recordkeeper’s system,” says Terry Dunne, senior vice president and managing director of retirement plan services at Millennium Trust in Oak Brook, Illinois. “Tests should be run to check for errors [in participant census data].”

Likewise, vesting and beneficiary data should be checked to make sure it is accurate, Ouellette says.

Bevilacqua says she has witnessed new recordkeepers finding during conversions that there are discrepancies between the plan document and how a plan was actually administered while with the prior recordkeeper. Depending on what the discrepancy involved, the plan sponsor may have to go through a Voluntary Correction Program (VCP) filing with the IRS.

Yet another area in which MassMutual has seen mistakes is participant loans. Sometimes, plan sponsors fail to monitor them as closely as they should have. “Participants may have missed payments or are behind schedule, so it may be necessary to refinance them or seek out additional payments,” Bevilacqua says.

And, after assets are moved to the new recordkeeper, it is very important to ensure that account balances match, both in total and for each participant, Parks says.

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