4 Fiduciary Resolutions for 2024

A brand new year awaits us – and with the New Year comes an opportunity to assess and reassess – for some when, resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are some for plan fiduciaries for 2024 – that could benefit plan outcomes for years to come. 

See if your target-date options are over-weight(ed) 

 

Flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms – nearly all of which (despite marketing brochures to the contrary) appear to share very similar views as to what an appropriate glidepath is supposed to look like – and nearly all of which have embraced the notion that a target-date is little more than a speed bump along the “through” target-date glidepath. 

 

A target-date fund is, of course, a plan investment. Like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department). Particularly in view of recent market volatility, it’s worth (re)examining the asset allocations – and perhaps most significantly those that are applied to target dates that are near-term – and ask yourself – should an individual within five years of retirement have that much invested in those options?     

 

Look, the reasons cited behind TDF selection run a predictable gamut: price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers or compatible with their program) – and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics.  

 

Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above – and it’s probably (past) time you took a fresh look. 

 

Pump up the default rate in your auto-enrollment plan

 

While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and change after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons. 

 

But for those who have already embraced automatic enrollment, those are plans that have (apparently) overcome the range of objections: concerns about paternalism, administrative issues, cost – some may even have heard that fixing problems with automatic enrollment can be – well, problematic (though things have gotten a little easier on that front). 

 

With more than a couple of decades of experience under our belts (a third of that under the auspices of the Pension Protection Act of 2006), we know a couple of things. First, 3% isn’t “enough” (ironically, that is probably what accounts for its popularity – it’s small enough that it wasn’t thought to spur massive opt-outs by automatically enrolled participants). We also know (or should) that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, which is a floor, not a ceiling. And finally, that – at least according to any number of industry surveys – a default contribution rate twice as high as the prevalent 3% would likely not trigger a big surge in opt-out rates. However, there is a great deal of difference in the retirement outcomes between the two. 

 

On an encouraging note, more than half of the respondents to the 66th Annual Survey of Profit-Sharing and 401(k) Plans now have an initial default contribution rate in excess of 3% - and nearly as many (27.6%) have a rate of 6% as do (29.2%). 

 

Give reenrolling a second thought 

 

There is a natural human tendency to apply change from a point in time forward, to apply a new approach in plan enrollment, like automatic enrollment only prospectively, to workers who join the company after the point in time at which it is effective, rather than retroactively. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time. 

 

However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt-out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer applied. 

 

Regardless, don’t you owe them the same opportunity that you are giving your new hires? 

 

Develop a plan budget

 

Most financially-focused New Year’s Resolutions focus on spending (less) or saving (more)—and the really thoughtful ones do both—all tied around the development of a budget that aligns what we have to spend with what we actually spend.  

 

Most (many?) plans have a budget when it comes to the expenditures that require corporate funding. Less clear is how many establish some kind of budget when it comes to what participants have to spend. Now, granted, what they pay will vary based on any number of …variables—but an essential part of ensuring that the fees paid by the plan (for the services provided to the plan) is knowing how much—and for what.  

 

At some level, that means not only keeping an eye on things like expense ratios, the options with revenue-sharing and the availability of alternative share classes (or options like CITs)—but it also means having an awareness not only of the plan features but the usage rates of those plan features. 

 

Because when it comes to retirement plans, there often IS a direct link between spending less and saving more.

- Nevin E. Adams, JD

3 Ways to Get Your Automatic Enrollment Plan Out of its Rut

Inertia is a powerful force in nature, and in human behavior. Even the most proactive and engaged plan designs (and plan designers) can, over time, slide from being in a groove to being in a rut.

Here are three ways to reinvigorate automatic plan designs.

1. Auto-enroll all Eligible Participants

Over the past decade a growing number of plans have embraced automatic enrollment, in the process not only simplifying and streamlining the process, but also expanding the number of individuals who are saving for retirement. These days, new hires, regardless of their age, are routinely defaulted not only into the plan itself, but also into some type of qualified default investment alternative, whether it be a managed account, target-date fund, or balanced fund.

However, those who have been employed for some time are often not accorded that convenience. Instead, perhaps because they are presumed to have previously made a decision not to participate, it is assumed that if they were to have changed their mind, or have changed circumstances, they would take it upon themselves to enroll on their own. Or perhaps in some cases, the very success of automatic enrollment gives pause because adding all those existing workers to the plan (along with matching employer contributions) brings with it financial consequences.

Regardless, and certainly if the plan has had automatic enrollment in place for new hires for a time, the better way, it seems to me, is to offer the same opportunity to all eligible workers.

2. Auto-escalate Employee Contributions

While there is evidence that this is changing, for nearly as long as there have been automatic enrollment plans (and it goes back to the early 1980s at least), the default contribution rate has been 3%. Now, regardless of how that became the default of record, eventually becoming ensconced in the auto-enroll safe harbor of the Pension Protection Act of 2006, there’s one thing on which nearly everyone will agree: a 3% rate of savings is almost certainly not enough.

Having embraced the automatic enrollment design (and, with luck, extended that to all eligible workers), you can make automatic enrollment better by helping participants save more by automatically increasing their rate of savings by 1% or 2% per year. There is some evidence that, with a three- to four-year lag, plans that have adopted automatic enrollment do move on to add auto-escalation as an option. But think of the missed retirement savings and security in the interim.

3. Reenroll at Least Once – and Maybe More

A common practice in moving from one recordkeeper to another has been to “map” similar fund options from the old platform to comparable (if not identical) funds on the new platform. In recent years, this mapping process has been improved by not just copying over existing fund choices (which may not be optimal, and may not have been reviewed or updated in a long time), but by reenrolling everybody in the plan to an age-appropriate asset allocation fund, such as a target-date fund.

Reenrollment has some logistical and communications issues, of course. It is a bit like moving every year, and if not nearly as complicated (or costly) as actually changing recordkeepers, it can be challenging to explain, particularly to participants who themselves have slipped into a rut. And you might well be advised to leave participants who have voluntarily elected to opt out of the reenrollment once (or twice) where they elected to be.

But if as a plan sponsor/fiduciary you have liability for the fund choices participants have made (and, outside of a 404(c) safe harbor, you do), wouldn’t you want to take advantage of the opportunity to help participants invest their retirement savings in a fund that is overseen by professionals, rebalanced on a regular basis and invested with some sensitivity to their retirement timing?

Or, as the foregoing suggest, at least have a process in place that not only reminds them of the advantages – but nudges them toward a better result.

- Nevin E. Adams, JD

See also:

• Is Automatic Enrollment Still Going… or Slowing?
• 3 Things You Should Know About Automatic Enrollment
• Are Auto Engagements Over?

7 New Year’s Resolutions for Plan Sponsors

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are mine for plan sponsors.

Put your fund menu on a diet.

Though it is a point often made with jellies and ice cream, a long-standing behavioral finance tenet is that more choice doesn’t lead to better decisions. So what’s with those burgeoning 401(k) investment menus? Plan sponsors tend to offer more than 11 investment options in their DC plans, with 38% offering 11 to 15 options and 45% offering more than 16 options, according to the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints study, which polled more than 400 plan sponsors and other industry professionals.

Odds are that you have funds on your menu that either aren’t being used or being used widely — options that contribute little other than clutter to your investment review and to the decisions of your participants. Take a look — your retirement plan menu shouldn’t be a kitchen sink “solution.”

If you don’t yet auto-enroll workers in your plan, it’s time to start.

There are a lot of reasons given to not initiate automatic enrollment: the notion that these are voluntary, not mandatory benefits; that you don’t want to be too paternalistic; that you don’t want to create a burden for someone who will then have to take steps to unenroll; or perhaps that most commonly cited concern — that by defaulting someone into the plan you will wind up with an angry employee darkening your door. It won’t.

Besides, how much time, energy and expense are you dedicating to the process of encouraging workers to enroll in the plan voluntarily?

If you do auto-enroll participants, raise the bar: Pump up that default to 6%, not 3%, of pay.

We all know that 3% isn’t “enough” to provide retirement security. That said, it remains the most common auto-enroll default rate, doubtless because it is the rate specifically stated in the Pension Protection Act (though it doesn’t prohibit a higher rate). Indeed, since the advent of the concept in the early 1980s, 3% has been the most typical rate, both because it was cited in an IRS example of the concept, and because it has been deemed low enough that it wouldn’t create a financial burden and/or a threshold high enough to warrant an opt-out on the part of the participant.

But if you’ve been doing automatic enrollment for a while now, you’ve had a chance to shake out those adoption “bugs” and to get a feel for how it has affected your participation rate, your match dollars and employee morale. And even if you haven’t done automatic enrollment, why start with a default rate that you know is bound to come up short?

Surveys suggest that there is very little difference in participant opt-out rates between 3% and 6%. But there is a great deal of difference in the retirement outcomes between the two.

Give reenrolling a second thought — and your workers a second chance.

There is perhaps a natural human tendency to impose a new approach/regimen from a point in time forward, to apply a new approach in plan enrollment like automatic enrollment only prospectively, only to workers who join the company after the point in time at which it is effective. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time.

However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer apply.

Regardless, don’t you owe them the same opportunity that you are giving your new hires?

Rethink the composition of your investment committee.

People find themselves on plan committees for any number of reasons, good and… not so good. Regardless, this shouldn’t be a position of “honor.” It should be reserved to those who have the knowledge to make sound fiduciary determinations, the courage to make tough choices and the discipline to keep a written record of those choices. They should do so with a full appreciation of the personal liability that comes with their role as a plan fiduciary and a commitment to not only prepare for these deliberations ahead of the committee meeting, but to take their participative role and attendance at these meetings seriously.

And if you don’t have an investment committee, you should resolve to fix that this year as well.

If you don’t know how much you’re paying for your retirement plan, find out.

As a plan fiduciary, you are expected to ensure that the plan pays no more than reasonable expenses for the services rendered to the plan. To do so, you must know the services rendered, who renders them, how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable. But if you don’t know the first part, you can’t determine the last. And if you can’t do that, you aren’t fulfilling your duties as a plan fiduciary.

And that could be trouble. For you, and the plan.

Unless you’re an expert in retirement plan design, fiduciary responsibility and investments, get help.

Nuff said. In fact, you might want to start here. It could make fulfilling those New Year’s Resolutions all the easier…

See also 6 Questions to Ask at Your Next Investment Committee Meeting.

- Nevin E. Adams, JD