Opinions December 7, 2012

Top Trends in the Retirement Plans Industry

December 7, 2012 (PLANSPONSOR.com) - This has been was a year marked by meaningful changes influencing the retirement savings environment.
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As the year ends we are reminded how important it is for providers to work closely with plan sponsors to ensure that their offerings evolve in ways that have a positive impact on plan participants’ ability to boost their retirement readiness and feel confident about their retirement savings plan. To understand where we are heading, it is helpful to look back at some of the most noteworthy industry topics over the past year and consider how they will continue to affect the 403(b) plan space in the year to come.   

Participant Fee Disclosure  

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Without question, participant fee disclosure was the most substantial development in the retirement plans space this year.  In many cases, executing fee disclosure requirements proved to be more complicated than anticipated for everyone involved. In fact, the Department of Labor acknowledged the complexity surrounding this new regulation by twice extending the regulatory period to comply.   

For most plan sponsors, fee disclosure provided an excellent opportunity to engage participants and encourage them to take a more active role in saving for retirement. Fee disclosure has opened conversations leading to a better understanding of what plan sponsors and participants are paying for the services and benefits they receive. Fees can and should influence participant investment decisions, but are only one part of the story. Overall plan value must be part of the fee disclosure conversation.   

As providers and plan sponsors evaluate the success of this initiative, here are a few things to consider:  

  • How helpful were the materials participants received? 
  • Did they successfully convey all the required information?  
  • Was this information clearly understood by plan sponsors and participants?  
  • How smooth was the fee disclosure implementation process?  
  • And most important, how are you determining the answers to these questions? Do you have relevant data or are you gauging your success through anecdotal feedback? 

The ramifications of fee disclosure have not yet been felt and it is unclear, at this early stage, what participants will do with this new information. It is up to providers and plan sponsors to take lessons learned from the initial disclosures and enhance communications in a way that helps participants understand the true value of their total retirement plan offering.  

Transformation of Retirement Plan Communication and Service  

A particularly meaningful and positive trend in 2012 was the movement toward enhanced retirement plan communications. This year, the industry saw a clear acceleration with a focus on retirement education and a higher level of value-add services delivered to plan sponsors and participants. Industry leaders, including Lincoln Financial, conducted and shared research illuminating plan sponsor attitudes about the effectiveness of communications programs.  Providers who offer communication and education across a variety of channels are more likely to motivate participants to take actions that will boost their retirement readiness.   

The industry is coming to the realization that a retirement plan communications program is not “one-size-fits-all.” Whether it is online, in print, on the phone, through the mail or in one-on-one in person meetings, providing employees with resources tailored to their needs and their environment increases their understanding of plan offerings and their engagement with the plan. This is especially true in the health care profession – a field often characterized by around-the-clock care and variable work schedules. Actively researching how plan participants want to receive information is critical and reaching them on their terms are essential ingredients to overall plan satisfaction.   

Many providers offer knowledgeable retirement professionals who can help answer any questions about plan services, including fee disclosure. This year, some companies announced they will hire people who will go on-site – a service that Lincoln has practiced for 15 years and firmly believes provides a high value of service to plan sponsors. In many cases, these on-site retirement specialists serve as an extension of the HR department and play a critical role in helping participants understand the benefits they receive from their plan and what they need to do to better prepare for the future.

Providers are also changing the conversation around retirement savings. In the new year, we will likely see retirement education moving away from plan mechanics to a more personalized communications approach. An outcomes-focused conversation, such as asking participants where they want to be when they retire, and considering their monthly income at the time of retirement, is becoming more prevalent. This approach is transforming participants’ interest in their retirement plan benefit in a more tangible and meaningful way.   

What’s Ahead  

There’s no doubt that fee disclosure will continue to evolve. Providers, who proactively monitor and prepare for additional requirements, in partnership with their plan sponsors, are more likely to reap the intended benefits of transparency.  The positive transformation of plan communication and services will likely continue as well.  

In addition, privacy and technology issues will be top of mind for providers and plan sponsors in 2013. Providers and sponsors must maintain their vigilance about the privacy of their employees’ information. In today’s technology environment, where personal and professional worlds blend in to each other and mobile devices support a 24/7 connected mentality, traditional firewalls are no longer sufficient. Additional safeguards must be implemented. Plan sponsors should make sure their providers are diligent about protecting employee information – including login policies, password protections, access validation and more.   

We also look forward to a heightened awareness of the need for people to save in a way that gets them “to and through” retirement. As savers demand ways to generate a retirement paycheck for life, plan design will evolve to address this compelling issue. True income guarantees within employer-sponsored plans will become more prevalent.   

Plan sponsors and providers must embrace these issues and demonstrate their commitment to foster employee confidence about retirement savings.  After all, helping people take actions that result in healthier outcomes – whether for physical, mental, economic or financial well-being – is a common thread between the health care, non-profit and retirement planning industries. This is an exciting time in the evolution of employer-sponsored retirement plans. All stakeholders have the opportunity to be part of solutions that will better engage savers and improve our outlook on the future.  

 

Chuck Cornelio, President, Retirement Plan Services, Lincoln Financial Group  

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Benefits December 6, 2012

Paring Down Providers: A 403(b) Sponsor’s Experience

December 6, 2012 (PLANSPONSOR.com) – Southern Methodist University (SMU) shared during a recent event its experience paring down to one 403(b) provider.
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With 2,340 benefits eligible staff and 450 retirees, SMU faced a problem: How will it handle the new IRS and Department of Labor (DOL) requirements for 403(b) retirement plans? Following passage of IRS regulations in 2007, the university found itself accountable for monitoring plan activity to make sure contribution and withdrawal limits were not exceeded. In addition, the DOL’s recent provider and participant fee disclosure requirements mean plan sponsors must choose either to do the impossible and track all funds from countless providers, or pare down to just a few providers—or, in SMU’s case, just one.

Initially, SMU offered its participants funds through three providers—Fidelity, Vanguard and TIAA-CREF. The burden on staff was tripled as they maintained three vendor relationships and spent triple the time and resources, and the legal department had three sets of custodians. Most importantly, the sponsors were doing an injustice to plan participants, requiring them to visit three websites and understand multiple retirement calculators, which affected participant engagement and resulted in underperforming investment choices.

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In 2011, SMU was audited by the IRS. “We did what anyone does—served them bad coffee and gave them hard chairs,” Bill Detwiler, associate vice president of human resources and business services at SMU, said during the seminar. While the agency was performing a general audit, it ended up staying for eight weeks, and found one plan participant who had deferrals exceeding limits by $1,500. As a result, SMU was fined $1.1 million, and ended up paying $140,000 and attorney fees. This was a factor encouraging SMU to search for a single vendor.

SMU knew that Fidelity, Vanguard and TIAA-CREF would not necessarily recommend each other’s fund families, and it was looking for an unbiased recordkeeper. It was also aiming to pare down options; its research found that for every 10 funds offered, about 2% of faculty and staff engagement is lost. So, SMU chose Diversified as its recordkeeper, and narrowed down its fund lineup from nearly 500 to about 20.

 

It now has a single platform with three tiers, including active and passive funds, open architecture and a qualified default investment alternative (QDIA) option. Tier 1 is made up of target-date funds (TDFs); tier 2 contains the core asset class funds; and tier 3 is the open brokerage window, where SMU does not limit contributions, and participants sign a waiver acknowledging that SMU has no fiduciary obligation.

The transition was not “seamless,” Detwiler said. When mapping participants over from their old funds to the new lineup, certain funds in accounts with previous providers were not included, and some petitioned to stay with those funds. This was an oversight on the plan sponsors’ part, Detwiler noted, and it created mapping challenges. If the old funds matched the new investment policy statement (IPS) criteria, they could join the new lineup. For instance, TIAA-CREF Traditional is a popular fund, Detwiler said; SMU froze contributions to this fund, unless they were through Diversified. SMU passed funds such as this through the investment committee and performance filters, and added those that qualified, so that the lineup expanded from 14 to more than 20.

The final challenge in redesigning the plan was communication. SMU was faced with combining human resources, public affairs, Diversified and faculty representatives into one communication team for participants. SMU found the best method was a multi-medium, multi-step process. In addition to e-mails, it also distributed a newsletter for the older age group that might not use e-mail regularly. It also had to solve for how much information to dispense; too much could overwhelm participants, but too little would be considered a lack of transparency. SMU also met with small constituency groups; held town hall meetings covering a high level of information and benefits of the change; hosted group education meetings reviewing details about fund migration and key dates, with an attendance of 40% of the campus population; and held one-on-one enrollment meetings on campus, which saw more than a 50% turnout.

SMU added an on-campus counselor from Diversified as a point person to answer any questions participants might have. It also created the Retirement Plans Advisory Council (RPAC), which advised the plan sponsors about design decisions in a non-fiduciary capacity.

Another issue SMU encountered was during the transition period, or what it calls the “quiet period,” Sheri Starkey, director of total compensation and senior associate director of human resources at SMU, said. When assets were transferred, participants could not see their money for 16 to 20 days, which created an anxiety despite the communication SMU had done in preparation. Additionally, some providers contacted participants individually trying to convince them to maintain their old funds, including older retirees who still had assets.

Ultimately, the change was for the better, SMU said. One advantage of consolidating to a single provider was an overall drop in administrative fees and expenses. Recordkeeping basis points returned to the plan sponsors rather than to the vendor. All plan money aggregated into a single platform, and participants were able to save on fee structure. This also eliminated the complications and confusion of having three different recordkeepers.

Before consolidating to one provider, there were delays in enrollments and other changes because of the paper process, and SMU had to make up lost contributions. Now, employees enroll and make changes online, which is more timely and immediate. Secondly, there is a lessened risk of participants making poor investment decisions with an overwhelming plan lineup of more than 500 funds. The committee works with the investment adviser to screen and choose one fund lineup. Loan administration and hardship withdrawals are also monitored more easily, and the risk of being out of compliance is greatly reduced. Reporting is also less fragmented; reports are available online, and Diversified files the Form 5500.

After all the plan changes, SMU saw a spike in participation. Among all age groups, participation increased an average of 23%. For those younger than 30, at the beginning of 2012, participation was 17%; by the end of the year, that jumped to 34%. There was also a peak in automatic escalation. At the beginning of 2012, no participants auto-escalated; by March, 79 participants did and by October, that number reached 151.

 

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