Data and Research June 30, 2015

Providers Losing Plan Sponsor Trust

According to Chatham Partners, plan providers may be at risk of losing their clients.
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The annual Provider Loyalty Index from Chatham Partners measures the loyalty of retirement service providers’ clients, placing sponsors on a scale from “loyal” to “favorable” to “at-risk.”

Fewer plan sponsors rated their providers’ services highly this year. On a 7-point scale, the percentage of respondents who ranked their provider as a 7 or 6 for “provid[ing] high quality service” fell from 85% to 73%. Just two-thirds reported that their provider “reduces administrative burden” (68%) and “offers solutions to plan objectives and goals” (67%); both of these figures are down from more than three-quarters in 2014.

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In 2014, 61% of sponsors with decisionmaking authority over their plans were classified as “loyal,” according to Chatham Partners’ calculations. This year, that number has fallen to 57%. The “favorable” and “at-risk” groups each gained 2 percentage points, going from 26% to 28% and 13% to 15%, respectively.

“As providing superior client service is becoming the norm rather than a point of differentiation for providers, it is important that retirement plan providers also succeed in providing value added services that assist plan sponsors in meeting retirement plan goals,” said Chatham Partners CEO Peter Starr.

Last year, two-thirds (66%) of plan sponsor clients were classified as promoters of their providers’ services, 26% were passive, and 9% were listed as detractors. The number of detractors has increased to 12% this year, and at 28%, more sponsors are neutral on their providers as well. Just six in 10 sponsors (60%) can now be counted on as promoters, which could signal impending requests for proposals (RFPs) for many firms.

“It has become evident that the increasing pressures being placed on meeting plan goals is changing the conversation on how providers are evaluated,” Starr added. “Providers are being asked to provide more value by increasingly sophisticated technology at lower margins.”

In its review of more than 11,000 plan sponsors, Chatham Partners asked them to rate the degree to which their provider: “helps fulfill fiduciary responsibilities”; “is committed to technology”; “treats [them] as an important client”; “offers a full range of services”; “flexible meeting [their] unique needs”; “provides good value for the money” and whether they “would recommend [their provider] to others.” Plan providers looking to gain a competitive edge may want to develop their practice in these areas to boost their sponsors’ ratings. 

Ask the Experts June 30, 2015

(b)lines Ask the Experts – Should the 15-Year Catch Up Be Eliminated?

“Do the experts have any thoughts on the 15-year catch-up election?
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“Do you think it is a desirable plan provision? If not, can it be eliminated? What are the potential issues/impacts of elimination?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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Thank you for your question! The 15-year catch-up election continues to be hot topic among eligible plan sponsors, and the issue has not been addressed in the Ask the Experts column format in several years. Thus, a refresher is certainly in order!

In an article for PLANSPONOR back in 2012 (see “15 Year Catch-up: The Dinosaur of 403(b) Plans?”), one of the Experts  detailed the difficulties with the 15-year catch-up election—all of which are still valid today:

1)         Complexity—the election is among the most difficult to calculate in the defined contribution arena, requiring contribution data for the entire working career of an individual employee. The complexity has been exacerbated in recent years with the addition of the age-50 catch-up election under Code Section 414(v), which creates confusion over which election is actually being utilized as this Ask the Experts column from 2011 illustrates;

2)         Audit risk—15-year catch-up calculations are one of the primary issues identified in IRS audits, and lack of compliance appears to be widespread; and

3)         Applicability—legitimate utilization of the election is often low, as most of the participants who can afford to contribute in excess of the standard 402(g) elective deferral limit do not qualify for the election since their lifetime contributions would exceed the maximum threshold for use of such an election.

 

The trend identified in the 2012 PLANSPONSOR article has only accelerated since that time; more and more plan sponsors who previously permitted the 15-year catch-up election have simply decided to eliminate it (to address your question above regarding elimination, the 15-year catch-up is indeed an elective, and not a mandatory, plan provision, so it may be eliminated via plan amendment). 

Of course, there can be a potential employee relations issue here, the scope of which is dependent on the number of individuals actually utilizing the election. By definition, that figure should be low (some plan sponsors have discovered upon review that not a single individual was utilizing the election!), which minimizes employee impact. If the number of individuals is high, you may wish to conduct a review of the elections to ascertain the accuracy of the calculations.

After that analysis, the plan sponsor may choose to eliminate the election prospectively (e.g. existing individuals who are utilizing the election  may continue to do so until their elections are exhausted, but no new 15-year catch-up elections may be made) or eliminate the election entirely. The former approach may serve as “soft landing” for affected participants, especially if a significant number of individuals are utilizing the elections. Other than this employee relations issue, all other impacts of the removal of the 15-year catch-up election should be positive as implied above.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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