Three ‘Scary’ Things That Give Plan Sponsors Chills

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… 

Things like…

Changing Providers

OK, they may not exactly be “scared” of changing providers, but it’s certainly not a process for the faint of heart—particularly with all of the competing focus priorities confronting plan sponsors on a daily basis. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.

Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be (there are inevitably a lot of “skeletons” in those closets). Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees—and sometimes more than one of the above. 

And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than anticipated or desired (see also 3 Things Plan Sponsors Should Know About Changing Providers). And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?

ESG

In fairness, it’s probably not Environmental, Social & Governance (ESG) investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns about their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers, particularly younger ones, want these options. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among DC plans has been tepid—and the take-up rate among participants who have the option is even lower. Indeed, fewer than 3% of plan sponsor respondents included that option on their plan investment menu, according to the Plan Sponsor Council of America’s 63^rd Annual Survey of 401(k) and Profit Sharing Plans, and only about 0.1% of plan assets were invested in those options. Those looking for a counterpoint might note that ESG options were more common among the largest plans (those with more than 5,000 participants) and the smallest (fewer than 50 participants), where 4.2% and 4.4%, respectively, offered that option.

The hesitancy likely comes (at least in part) from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least not discouraging it), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then, roughly a year ago, the Trump administration weighed in with a proposed rule that was harshly critical of ESG (unless a “pecuniary”—that is, financial—rationale was evident)– and ultimately a final one that moved off that stance a bit, but still left room for caution. 

After first announcing that it had no intention of enforcing that rule, the Biden administration’s DOL has recently provided a (new) proposed rule that—arguably—puts these options in a more positive light. Indeed, in its current form it actually seems more supportive than the “all things equal” standard put forth by the Obama administration, though it remains a proposed rule, with comments being taken for consideration in shaping a final version.    

All of which arguably (still) leaves plan sponsors contemplating a shift to ESG with a lingering uncertainty. They may not be “scared,” but one can certainly understand a bit of as-yet-unresolved apprehension.

Lifetime Income Options

Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are even more hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide some version of this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

The Standard

Don’t get me wrong—there are plenty of things for ERISA fiduciaries—who are, after all, personally liable not only for their actions, but those of their co-fiduciaries—to be worried about. The standards with which their conduct must comply are (as one court has put it) “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—and even though it may be “scary” from time to time… the alternative is surely worse…

- Nevin E. Adams, JD

Are We Ready for Retirement Income?

 It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default. 

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD

Resource Full?

A great resource to help you grow and expand your business could be right under your nose…

Are you spending time you don’t have trying to work out problems you didn’t create? Let’s face it—good service, or the lack thereof, is widely cited as the most common reason that plan sponsors change providers—and that can affect your relationship as well. Sometimes you chose those providers, other times you inherit them. 

Regardless, every plan has someone in charge of administration and compliance—a third party, if you will, so called because they perform functions that plan sponsors are expected to ensure are performed (and once upon a simpler time many did so themselves). Whether you engaged those services, or find yourself tasked with overseeing them, you know they can be the difference between a smooth-running plan and one that constantly teeters on the brink of blowing up. Wouldn’t it be nice if you could partner with this “third party” administrator to take some of the burden off your shoulders and give you the time you need to spend elsewhere?

Not that the solution is unknown—roughly a year ago, we surveyed NAPA advisors, and found that nearly all (96%) partner with specific third-party administrators; just over half (55%) focus on one to three firms, while a quarter limit it to just one. Not surprisingly, service was cited as the primary consideration in choosing a TPA partner (56%), while fewer than half as many (26%) cited an ability to help with plan innovation. However, nearly half (45%) of the survey respondents said that less than a quarter of their new business is sold with a TPA.  

The reality is, of course, that like advisors, all TPAs are not created equal—they have different strengths and skillsets, and wildly different ideas as to their responsibilities and services. That makes it hard to obtain an apples-to-apples comparison. Indeed, the fact that each recordkeeper has a different process for just about everything makes it easy for things to fall by the wayside if you don’t have a clear assignment of responsibilities with every party.

Do you prefer the simplicity of a bundled solution? Well, they’re also a TPA, though again many define their process and services differently. Ultimately, the value a good TPA can (and arguably should) add to your practice are things like:

• Free up time. With price compression, find ways to leverage partners to provide services so you don’t have to. They’re a—if not the—point of contact for administrative questions, solving the day-to-day problems, things like that. 
• Help you win business. By partnering with you to craft customized solutions, where appropriate, for your customers—and prospects. They can/should be your right hand technical expert both in attracting and retaining good clients.
• Ensure that your client’s plan remains in compliance. At times it seems as though 1,000 different things can go wrong on any given day—and there’s clearly value both in administering the plan competently so that problems are avoided, and knowing how best to remedy the situation when those problems inevitably do arise. They not only bring specialized knowledge, but also the opportunity of providing a single point of contact for technical issues involving plan administration and testing. 

Bundled or unbundled, a good TPA can be a plan advisor’s best friend. Ultimately, the choice to use a TPA—or which TPA is chosen—may depend on the size of a plan or the plan sponsor’s particular needs. As with everything in life, the relationship and cultural fit is paramount. 

In (too) many situations recordkeeper/TPAs seem to be viewed not merely as a third party, but as a third wheel—someone who at best is a necessary evil —and at worst, destructive to its smooth operation. 

That said, a deliberate, thoughtful—dare I say “prudent”—partnership with these “third” parties, one that specifies assignments, roles and responsibilities—in that review meeting, and on an on-going basis can not only free up your time, but provide better service, higher client retention, more sales opportunities, and improved legal and operating compliance for the plan sponsors you serve.

Let’s face it—if they’re not an active, engaged member of your team, they should be.  

- Nevin E. Adams, JD

‘Might’ Makes… Wrong?

 Sometimes the motivations of those attacking the 401(k) are pretty obvious.

The most recent was an article by a Maurie Backman at the Motley Fool titled, “Why a 401(k) isn’t the wonderful savings tool you think it is.” I tried to ignore it when it first (to my eyes) appeared on Forbes (which seems to have a pretty low threshold for contributions these days), and I was no more inclined to read it when it showed up a couple of days later on Fox News. But then folks started sharing it on both LinkedIn and Twitter—some ostensibly to hold it up for ridicule,[i] others as an affirmation—and, with some reluctance, I finally clicked on the article. 

Oddly, considering the title (and, in fairness, editors have been known to tweak headlines such that they bear little resemblance to the article they are attached to), the article spent almost as much space outlining the virtues of the 401(k)—specifically that they are “easier to sign up for” than an IRA, and that they have (much) higher annual contribution limits, even for catch-up contributions.

So, what’s their beef(s)? Backman makes three points:

1. That investment choices in a 401(k) can be limited (specifically that you generally can’t buy individual stocks).
2. That fees in a 401(k) can be high (the issue here seems to be the inclusion of actively managed funds alongside index offerings—and an assertion that “401(k)s plan come with administrative fees that generally are not negotiable. The administrative fees you'll pay with an IRA are typically much lower”—an assertion that doesn’t align with my experience, but is offered without data).
3. That a Roth option isn’t guaranteed (this factual assertion despite the fact that the most recent data from the Plan Sponsor Council of America that more than two-thirds of 401(k)s do currently provide the option).

To sum up: According to the article that claims the 401(k) isn’t a wonderful savings tool, the suboptimal aspects of a 401(k) are: (1) the options might not include individual stocks; (2) the fees can be high; and (3) you aren’t guaranteed to have the ability to save for retirement on a Roth basis—even though, by the author’s own admission, 401(k)s have much higher contribution limits and are easier to access, and thus are much more likely to be used (recall that data indicates individuals are 12-15 times more likely to save in a 401(k) than in an IRA on their own). Oh—and there’s only a passing reference to the employer match, which arguably also isn’t “guaranteed,” but is certainly more likely to be found in a 401(k) than in a stand-alone IRA.  

Perhaps it should come as no surprise that an article penned by the Motley Fool—a platform that purports to help individuals make stock picks—thinks that you’d be better off utilizing a retirement savings plan[ii] that would more readily accommodate their services. 

Yes, sometimes the motivations of those attacking the 401(k) are pretty obvious. The motivations of those choosing to publish such silliness? Not so much.

- Nevin E. Adams, JD

---

[i] Memo to those who did—clicking on the article is the whole point; sharing it only exacerbates the problem.  

[ii] To add to the irony, the article sums up its advice thusly: “What you should do in that case is contribute just enough money to your 401(k) to snag your full employer match, if one is offered, but then put the rest of your savings into an IRA. Doing so could help you invest more appropriately, avoid high fees, and enjoy the perks of a Roth saving option.” 

5 Plan Committee Missteps

There is frequently a difference between doing what the law requires and doing everything that you could do as a plan fiduciary. That said, there are things that plan fiduciaries must do—and things that, while not required, can keep the plan, and plan fiduciaries out of trouble.

Let’s get started.

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

You may well possess the requisite expertise to make those decisions—and then again, you may not. But even if you do, why forego the assistance of other perspectives?

However, having a committee for having a committee’s sake can not only hinder your decisions— it can result in bad decisions. Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least you ostensibly know who is supposed to be making the decisions. But if there is a group charged with overseeing the activities of the plan, and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

There is an old ERISA adage that says “prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. 

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors—sometimes at direction of legal counsel—choose not to put one in place. Of course, if the law does not specifically require a written investment policy statement (IPS)—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place. 

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forgo having a formal IPS; because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing ‘bad’ funds from your plan menu

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? Oh, and make no mistake—there will be someone with a balance in that fund. Still, how can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. Despite that, in my experience, most who find themselves in that role I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

If you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary (or at least the person who shared it with you is). I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities of an ERISA plan fiduciary.

- Nevin E. Adams, JD