Administration December 19, 2016

Mercer Suggests Areas for DC Plan Review

Plan design, investments, fees, financial wellness and the DOL’s fiduciary rule are all things defined contribution plan sponsors should consider going into the New Year.
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As the New Year is a time of personal reflection, it can also be a time of reflection for defined contribution (DC) plan sponsors.

Mercer provides recommendations for DC plan sponsors given current market conditions and challenges for the coming year.

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“Change is the only constant in today’s market. As such, it is crucial to maintain vigilance over managing DC plans. Governance should always be a key focus, but it’s not a silver bullet,” says Liana Magner, partner at Mercer. “DC plans need to evolve with changes in legislation, regulations, industry trends and the changing needs of individuals. What may have been ideal a few years ago may not be as ideal today.”

Regarding plan design, Mercer suggests that DC plan sponsors should review their participants’ behavior and assess if matching plan design is influencing the choices being made by employees. Are these the correct influences? How could the design be more effectively structured to influence the preferred behavior?

In addition, DC plan design should be evaluated regularly to ensure it is relevant for the participant base, Mercer says. To do this, employers need to understand their participants’ behavior, needs and priorities. Areas for review include: cluster analysis; assessing participants’ financial courage; reviewing how participants are using existing investment options and relative retirement preparedness. Analyzing non-participants is crucial as well, Mercer contends, so employers can better determine how they can get them to participate.

NEXT: Investments and fees

Regarding DC plan investments, Mercer suggests DC plan sponsors need to check when was the last time they reviewed their managed account provider and review if they could currently defend their choice. In particular, in the wake of the new fiduciary rule, plan sponsors should fully understand exactly what fiduciary role the managed account provider will be accepting. Understanding potential conflicts of interest and what type of advice the managed account provider will provide (particularly related to distributions) is also crucial for plan sponsors.

Mercer notes that the Department of Labor (DOL) issued guidance highlighting how DC plan sponsors need to ensure target-date funds (TDFs) remain appropriate for the plan’s participants. Plan sponsors should determine if their participant group has changed. Employers should also take stock of their current TDFs and check if they are still high quality, appropriate investments, as the market has evolved significantly.

Mercer also believes DC plan sponsors should consider, or reconsider, retirement income options. More is happening in this area with an increasing number of DC plan sponsors open to the idea of retirees taking partial withdrawals from the 401(k) plan. In addition, the proposed Retirement Enhancement and Savings Act of 2016 includes a number of retirement income-relevant provisions that will spark more conversations.

Regarding DC plan fees, Mercer says focusing on fees is important, but the discussion should be focusing on fees relative to the value of services received and the expected benefits of any additional fees incurred. All things being equal, clearly, lower fees make sense, but DC plan sponsors need to make sure to also assess the best fee structure for their specific needs and objectives.

NEXT: Financial wellness and the fiduciary rule

Employers have historically focused solely on DC plan features targeting retirement accumulation: asset allocation, auto-enrollment and other features, Mercer notes. However, today, companies need to acknowledge that employees may be dealing with other more-pressing financial needs and as a result, retirement may not be their priority. Guidance and tools are necessary to empower individuals to cost effectively manage their broader financial situations.

Along this line, employers should decide if student loan repayment plans have a place within DC plan design alongside matching employee retirement contributions, Mercer says. For many, paying back student loans is more of a concern than saving for retirement, yet focusing on student loan repayment may cause individuals to miss out on the employer’s 401(k) match.

As things stand, key provisions of the DOL fiduciary rule will be in place effective April 10, 2017. DC plan fiduciaries need to monitor whether the fiduciary rule will roll out as initially anticipated and how a plan’s vendors are changing their services to accommodate the rule, Mercer suggests. DC plan sponsors need to confirm if the services they selected will actually be the ones being provided in the future.

In addition, Mercer suggests DC plan sponsors ask which fiduciary responsibilities they should keep and which would be better served by delegating to a third party?

Finally, Mercer recommends plan sponsors should create a strategy to address and mitigate cybersecurity.

Data and Research December 19, 2016

401(k) Eligibility Nearly Universal

And when they are offered a plan, 87.6% of participants participate.
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Nearly 90% (89.4%) of U.S. employees are eligible to participant in their employer’s defined contribution (DC) plan, according to the Plan Sponsor Council of America’s 59th Survey of Profit Sharing and 401(k) Plans. Almost as many, 87.6%, have a balance in their plan, and 81.9% contributed to their plan in 2015.

The average deferral was 6.8% in 2015. Lower-paid participants contributed an average of 5.5%, while higher-paid participants contributed an average of 7.0%. Company matches to 401(k) plans averaged 3.8%, and the average contribution to 401(k)/profit sharing combination plans was 5.4%.

Just over two-thirds, 66.8%, of companies work with a financial adviser. Of those, 59.1% pay a fixed fee, and 35.1% pay a percentage of plan assets. The majority of plan expenses are paid by the company, with the exception of recordkeeping and investment consultant fees. Plans offer an average of 19 funds.

The funds most commonly offered are indexed domestic equity funds (79.3%), actively managed domestic equity funds (78.0%), actively managed domestic bond funds (74.7%), and actively managed international equity funds (73.4%).

Roughly one-third (34.6%) of sponsors offer investment advice, most frequently offered by a registered investment adviser (RIA) (28.8%), a certified financial planner (27.8%) or a third-party web-based provider (16.6%).

Over half (57.5%) of plans use automatic enrollment—most commonly at large plans (66.7%), but only among 25.5% of plans with fewer than 50 participants. Half of plans automatically enroll participants at a 3% deferral rate, up from 40.4% in 2014. The most common default option is a target-date fund (TDF). The report is based on a survey of 614 defined contribution plan sponsors.

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