Participants June 8, 2017

PSNC 2017: Top Trends

The 30,000-foot view of employer-sponsored benefit programs and participant trends—what may stay and what may change.
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Speaking at the 2017 PLANSPONSOR National Conference in Washington, D.C., two industry experts weighed in on top trends affecting retirement plan administration. Daniel Bruns, head of large defined contribution (DC) plan strategy and solutions for Morningstar Investment Management Inc., and Drew Carrington, head of institutional defined contribution – U.S. at Franklin Templeton Institutional LLC, discussed topics ranging from a new take on retirement income solutions, to the sizable impact that data analysis is having on plan customization—and the rest of those below—all reflecting current industry trends. The executives’ insights derive from their work with retirement plans and the sponsors who run them.

-Rethinking Retirement Income: The Inherent Appeal of a Distinct Retirement Income Tier. When discussing the role of retirement income in today’s plans, Carrington said, “I want to step back from retirement income having a single solution. The problem is, that’s a unicorn that just does not exist.”

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Instead, Carrington noted, the concept of retirement income is broader than a single investment option. “It’s a tool kit made available to participants that includes friendly plan design, targeted communication about over-age-50 catch-up contributions and a Social Security optimizer, to name just a few.”

-Making Income the Outcome – Trends in Developing Retirement Income Solutions. Bruns noted an acceleration in developing income solutions over the past year. “As an industry, we’ve given participants the chance to create great assets. Now they need help on the second half—how to invest these assets and how to take distributions.”

He pointed to three distribution solutions: a “through,” versus a “to,” target-date fund (TDF); a managed payout fund, which has a set distribution schedule of usually 4% but can be expensive; or a managed account, which also can be expensive.

-The Oversimplification of Overchoice: The Call for Curation—Rather than Elimination—of Choice. Industry experts have spoken for a long time about behaviors and participant decisionmaking, but where is the role of choice in retirement plans today? According to Carrington, “Automation has been great for the most vulnerable population—the young. But overall, the defined contribution (DC) industry tends to equate changes with expertise.

“We think participants don’t have the expertise to make their own choices, but maybe we’ve taken it too far,” he said. “Participants have preferences. As they become more engaged with their plan—when they are older and their assets have become more significant—limiting their choices can become problematic; they may want more differentiated options.”

-Core Menu Design in the Age of Default Investing. Bruns had a different view than many in the industry regarding how many funds should comprise a retirement plan lineup. He concurred with Carrington that core menus need to be expanded. “There has been a lot of movement on this trend,” he observed.

“Let’s re-examine the average person. He is defaulted into an asset allocation that he stays in until he leaves. [Average people] represent 80% of the participant population. But the other 20% want to do it themselves. They’ve been with the plan longer; they have more assets and are savvy investors. Diversification is important and is the only free lunch in the industry.”

NEXT: Working beyond prepackaged TDFs

-Working Beyond Prepackaged TDFs. As is well-known in the industry, target-date funds (TDFs) have gathered huge amounts of assets in the industry. Carrington feels that the funds have been a great tool, offering diversification for new employees. Still, he said, “DC investments have become more customized and defined-benefit [DB]-like but not in a standalone format—these custom funds have now been incorporated into the TDF.”

He continued, “We can go astray. By the time a participant gets to ages 50 and 60, his rate of equity may be too high. Picking one TDF can’t be right for all participants; it should vary according to the context of that person, overall.”

-Balancing Cost and Personalization in Selecting Appropriate QDIAs. Morningstar has plans in a variety of sizes, and, Bruns said, the plan sponsors often find QDIA selection a struggle. “The choice has to be right for the specific plan. When asked if we can help, we start with three primary questions: Does the plan sponsor have something that’s different than an average U.S. plan such as a company stock or a DB plan? Does the plan sponsor value personalization? Is the plan sponsor looking for participant advice?”

Morningstar has developed a process of analyzing demographic information to help make a decision on the right QDIA, Bruns said. “What existed five years ago, in terms of pricing and service, is in no way indicative of the current market.” He suggests re-evaluating QDIA options every two years. 

-Targeted Communications and Resources to Aid the Retirement Transition. Carrington noted that, in order for plan sponsors to reach out to participants in the most effective way, they need to look hard at the targeted demographics. For instance, he said, “Currently, job tenures for younger and older participants are about four or five years. With that said, for new employees to be auto[matically] enrolled at 6% when, in their previous job, their deferral had perhaps already increased to 10%, does not make sense. Invite them to save as they were.” This is one example of a targeted group, he said.

Another example would be those turning 50, whom the sponsor could target to consider catch-up contributions, Carrington said. That milestone birthday can become a trigger point to remind them that they have the opportunity to save more for retirement. “This kind of targeted message drives behavior. We may think they are not engaged, but targeted messaging shows otherwise. Do not generalize based on averages,” Carrington said.

-Using “Big Data” to Improve Plan Analysis. The push to use data is coming from service providers, and it has already transformed the industry, according to Bruns. “In the past, industry professionals would struggle to get four data points on a participant. If you fast-forward to today, we can get 12 points, and that allows us to better understand how they are tracking and then how we can help to move the needle,” he said.

He believes that, in the future, providers will begin to share data points about individuals. “Currently, this information is not shared willingly,” he said. However, he thought it was just a matter of time before, just as the health industry shares data, retirement service providers will join the data sharing revolution.

Working With Recordkeeping Partners. Morningstar, which works with 27 recordkeepers, has seen them evolve and become increasingly innovative, adding new products, dynamic QDIAs and mobile applications, all of which bring value to participants, Bruns said. “They are also adding widgets, which help engage younger participants. Recordkeepers are really investing in their space, so we expect to see many new features in the next couple of years.”

Benefits June 8, 2017

PSNC 2017: Supplementary Savings Plans—Executive Benefit and NQDC

Data from the Boston Research Group finds that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone, according to a panelist at the 2017 PLANSPONSOR National Conference.
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For executives, Social Security makes up less savings than for lower-income employees.

Speaking on a panel at the 2017 PLANSPONSOR National Conference in Washington, D.C., Jeff Roberts, regional channel manager at ADP, said executive benefit and nonqualified deferred compensation plans (NQDCs) are used by employers to attract and retain key employees.

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Jason Burlie, sales and strategic relationships – nonqualified practice leader at Prudential, added that the plans are used to make up for missed deferral opportunities for executives in the company’s qualified plan and to provide another retirement vehicle for executives.

Nonqualified plans are tax-deferred retirement vehicles that may be used by only a select group of highly compensated employees, Roberts explained. Some of their advantages: Nonqualified plans are exempt from Employee Retirement Income Security Act (ERISA) requirements that may be problematic; the Department of Labor( DOL) fiduciary rule is not a concern; and the plans are exempt from coverage and nondiscrimination testing and from Form 5500 filing.

Burlie added that NQDC plans offer unlimited deferral capability to executives. They are technically unfunded plans, even if the plan sponsor sets aside assets to help pay for future obligations. They are always subject to insolvency risk, and assets can go to creditors in bankruptcy.

Although they are exempt from many ERISA rules, NQDCs are subject to 409A regulations. But this doesn’t have to be complicated, Burlie said. In effect, in 2009, 409A set rules for NQDC plans, which previously came from case law. There are rules about when employees can make an election to defer to the plan, and 409A addresses how money can be taken out of the plan.

Roberts said data from the Boston Research Group found that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone. “Some don’t participate because they don’t understand the plan. Creating communication that is simple and actionable is important. Just because they are executives doesn’t mean they understand,” he said.

Burlie said he sees a rapidly growing rate of plans bundling both defined contribution (DC) and NQDC retirement services. “For many years, NQDC was a niche market, and there were a few niche providers; now more DC providers are developing expertise,” he said. The industry has seen a 20% increase, year-over-year, in bundling of these services, he said. There has also been an increase in advisers and consultants getting into the NQDC market, mostly due to financial wellness efforts.

According to Roberts, the growth in the NQDC market is coming from midsize companies, which are attracting employees who left large firms that had these benefits. So there is an increase in plan creation. At privately held companies, the market is seeing more company money going into NQDC plans as a bonus, rather than using company equity, to appease those who came from publicly owned companies that provided equity compensation.

NEXT: What’s ahead for NQDC design and funding

Burlie noted that, in Fortune 1000 companies, one-third use corporate-owned life insurance (COLI) to fund their plan obligations; one-third use mutual funds; and one-third are not funded. But plan sponsors in the small market mostly use mutual funds.

Robert Massa, director, retirement, at Ascende Wealth Advisers Inc., and moderator of the panel, told conference attendees that President Donald Trump is talking about changing the tax structure of retirement plans, and this may affect the offering and funding of NQDC plans.

If the Trump tax plan is implemented as laid out, it calls for 10%, 25% and 35% tax brackets, Burlie said. Most participants in these plans will be in a higher tax bracket, so he didn’t expect a significant change in plan offerings; executives will still be interested in these plans because of the insufficiency of qualified plans. However, he observed, capital gains tax changes may be different. If corporate tax rates drop to 15%, the NQDC market will see less use of COLI—a tax shelter—because returns of this long-term investment will be too far out, and no one expects tax cuts to be permanent.

He pointed to one plan feature often overlooked in NQDC plans: a restoration match. When executives defer into a deferred compensation plan, that money comes out before the income that is subject to defined contribution (DC) plan deferrals, so executives in these plans can’t defer as much on total income as the lower-paid, he explained, adding that 47% of NQDC plan sponsors do a restoration match or some kind of match to help executives get the full match benefit of what they could have deferred to the DC plan if not for NQDC plan deferrals.

In addition, according to Burlie, there is often confusion around FICA [Federal Insurance Contributions Act] taxes with nonqualified plans. Plan sponsors should know that they have to take FICA out when nonqualified balances vest. He suggested that plan sponsors engage in a conversation with plan providers about this.

“With more bundling and more advisers handling both DC and NQDC plans, there’s a concern that, if the provider or adviser is used to dealing with DC plans, they may not know the differences, and about FICA taxation,” Roberts said. “Plan sponsors should make sure they are working with NQDC plan experts.”

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