Benefits March 14, 2014

Recordkeepers Have Strong Influence on Participant Outcomes

March 14, 2013 (PLANSPONSOR.com) – Retirement plan participants’ savings rate is the most important factor for ensuring successful retirement savings outcomes.
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A new study focused on determining the influences, other than demographics, on participant deferral rates. Importantly, the study found the greatest independent impact on deferral rate is the employer match. This factor alone has two times the independent effect on deferral rates than age or household income, each taken separately, according to the survey. In addition, the data shows the participants’ level of financial literacy and level of confidence in being able to amass sufficient financial resources to comfortably retire are key drivers of deferral rates.

However, the survey also found the actions and effectiveness of a plan’s recordkeeper can have a positive or negative composite effect on deferral rates almost as powerful as the effect of the match.

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“One of reasons we were interested in doing this study is that when plan sponsors do a recordkeeper search, there’s not really an effective way to measure how well a recordkeeper engages plan participants,” Laurie Rowley, co-founder and president of The National Association of Retirement Plan Participants (NARPP), tells PLANSPONSOR. With the study, NARPP develop the FELT (Financial Empowerment, Literacy and Trust) score index comprised of factors, controlled by recordkeepers, that have a positive effect on deferral rates, she says. When evaluating which recordkeeper to use, the index shows which providers are helping participants save more, based on a combination of participant trust in the recordkeeper, education provided by the recordkeeper, and other areas of support.

According to the study, currently, only one in four (26%) participants feel they can “always trust” their (respective) recordkeeper to do what is right. This varies widely by recordkeeper from a low of 15% to a high of 38%.

“Intuitively, trust affects every relationship we have,” Rowley says. “We found trust impacts how often participants contact their recordkeeper, and also impacts the likelihood participants calculate what they need for retirement—one of the most important things participants can do prepare for a secure retirement.”

Among the 23 recordkeepers profiled, an average of 14% of participants indicated they contact their recordkeepers more than once every month, an average of 23% of participants do so once every month, and 30% reported they contact their recordkeepers several times a year. Ten percent said they never contact their recordkeepers. The study included responses from 5,000 participants among the 23 recordkeepers.

An average of 46% of participants has calculated how much they need for retirement.

One bothersome finding of the study, according to Rowley, is participants’ understanding of basic investment terminology was low. For example, only 38% of participants, on average, said they understand very well what diversification means—the percentage among women was even lower at 27%. “These are terms participants will need to know throughout their lifetime savings journey,” Rowley says. “If plan sponsors and recordkeepers do not educate them, they are setting participants up for failure.”

When asked about education provided from their recordkeepers, an average of 37% of participants in the study said the information presented to them is always in their best interests. Only one-third (34%) indicated the information helps them understand the basics of investing, and only 30% reported that fee information is presented in a way that is easy to understand. One-quarter of participants said sometimes the financial education feels more like product advertising or sales.

Rowley suggests plan sponsors consult with recordkeepers about how to educate participants. “Just because there is auto enrollment or automatic investing help via managed accounts or other vehicles, doesn’t mean [participants] don’t need to know the jargon,” she contends. “What if they change to an employer that doesn’t auto-enroll? Plus, this may be why there is such low level of engagement among participants who are auto-enrolled versus those who make the choice on their own.”

Information about the study, or about the FELT score index may be obtained for free by emailing Rowley at laurie.rowley@narpp.org.

Benefits March 14, 2014

Considerations for Service Provider Agreements

March 14, 2014 (PLANSPONSOR.com) - There are prohibited transaction rules in the Employee Retirement Income Security Act (ERISA) that prohibit fiduciaries from entering into agreements with service providers unless the services and fees paid are reasonable.
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There has been much ado in the past year about ensuring reasonableness of fees, but how can plan sponsors ensure services are reasonable? It starts with documentation in a service provider agreement.

“Although ERISA and the DOL [Department of Labor] offer no specifics, the DOL could find an agreement to be a prohibited transaction,” Philip J. Koehler, CEO of ERISA Fiduciary Administrators LLC in Newport Beach, California, tells PLANSPONSOR. He notes, however, there are some helpful tips sheets on the DOL website that give plan sponsors bullet points for what to take into account when selecting and monitoring providers.

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When crafting an agreement with a service provider, “first and foremost, plan sponsors need to have an inventory in their minds about what services they need instead of just having an open-ended conversation with a provider that may sell services not necessary for the plan,” Koehler says. Services need to be spelled out specifically in the agreement. Many providers have a standard form agreement, and some will not vary much from it, he notes. As fiduciaries, plan sponsors need to focus on whether there are options in the agreement for services they need for their plans.

It is helpful to inform providers of plan policies and constraints, Koehler suggests. Give the provider copies of the investment policy, fee policy and education policy. “If you don’t want a cookie-cutter agreement, you must give the provider specifics of the plan,” he says.

Basically, the agreement deals with all of the tangible services the provider is willing to offer, so it might spell out the processing of participant loans, but is there language in it that makes clear whether the provider will be performing any discretionary functions or has any discretionary control? According to Koehler, many agreements describe the loan origination process in detail, but will have in fine print that the plan sponsor is ultimately responsible for the decision of approving or denying plan loans. Processing is automated on most providers’ systems—and manually reviewing paperwork is more time consuming—so plan sponsors may find providers do not offer many options for such tasks, he notes.

“Most agreements are wallpapered with reminders that the service provider is not a fiduciary, and most have indemnification agreements that say the service provider will be held harmless if a participant or another party brings fiduciary action against the plan,” Koehler says. Plan sponsors need to think long and hard about whether these make sense to them; it is questionable whether this is reasonable, he warns. If plan sponsors are looking for someone to shoulder some of the fiduciary responsibilities with them, they need to be very clear about that, and the agreement should state that.

While it may not be spelled out in the agreement, plan sponsors should have a process in place for monitoring the service provider, as well as monitoring how participant complaints and processing mistakes are handled.

Another important thing, according to Koehler, is if the service provider is going to be handling assets in any type of way, there should be an appropriate fidelity bond in place. ERISA requires that any person/entity who exercises control over assets of a plan be bonded. If a fiduciary engages a service provider that is not appropriately bonded, the fiduciary violates ERISA.

The agreement should include provisions for terminating the agreement. Koehler says plan sponsors should make sure these provisions are commercially reasonable regarding termination fees if the plan sponsor takes its business elsewhere and regarding how much advanced written notice is required. Koehler explains that a six-month or longer notice and a charge of one year of fees is not reasonable.

Many plan sponsors lack the expertise needed to analyze service agreements, Koehler contends. It is wise for plan sponsors not to just sign it, but have an experienced lawyer or benefits consultant independent from the provider go through the document and look at items that will affect plan.

Koehler says it is “absolutely critical” those responsible for engaging the service provider are the signatories to the agreement. It could be the employer or a plan committee. If a committee or board, there may need to be a resolution passed before an agreement is signed.

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