Governance of DC plans has taken on greater significance as plan sponsors work toward securing appropriate retirement outcomes for participants. In 2014, Mercer believes that defined contribution (DC) plan sponsors must focus on securing retirement outcomes from these programs in ways that effectively manage both participant and organizational objectives and risk exposures.
Economic gains have yet to filter down to many in the workforce, and helping employees put their financial house in order has bottom-line advantages for their employers. At the same time, managing litigation, audit and public-relations risk has become more complex. 2014 looks to be an important year for judicial action, regulatory developments and stepped up litigation and enforcement. Mercer believes that establishing best practices across all areas of DC plan management is critical as DC plans become the primary engine for retirement for so many.
1) Redefine Success: Ultimately, a plan is successful if it meets plan sponsor objectives and delivers future financial security to participants.
Move beyond flat metrics such as participation levels and deferral rates. Analyze all participant behaviors that ultimately drive retirement outcomes, and develop sophisticated metrics and interventions to improve those outcomes.
2) Take a Broader, Sophisticated Approach to Investment Risk: A delegated investment solution may help manage risk through the lens of plan participants
Research in behavioral finance has shown that risk management involves more than just the prudent selection of a diverse set of investment options. Support employees by tailoring the plan’s investment risk profile to participant demographics. If resource constraints exist, consider the appropriateness of employing a delegated investment solution for all or part of the plan. A delegated approach to developing a demographically-based investment strategy leverages time while transferring fiduciary risk.
3) Understand Target Date Fund Fiduciary Responsibility: The DOL is watching
As an increasingly popular asset class within DC plans, target date funds have come under heightened scrutiny by the DOL. Consider whether or not the target date funds in the plan will lead to the desired retirement outcomes for the plan’s participant base. Review and document the evaluation of these options based on the DOL Target Date Retirement Fund Tips for Plan Fiduciaries.
4) Say Goodbye to Revenue Sharing: Paying administrative fees based on each fund’s level of revenue sharing may not stand up to scrutiny.
A red flag arises if some participants pay higher administrative costs simply because their fund options carry revenue sharing. Achieve transparency and level allocation of administrative fees by reducing or eliminating revenue sharing, or by allocating it back to participants.
5) Consider the Impact of Inflation on Participants’ Retirement Readiness: Don't let inflation erode outcomes
Despite the low interest rate environment from 2000 to 2013, participants’ purchasing power decreased by more than 20% according to a Mercer study. Purchasing power erosion and its effect on retirement readiness can lead to workforce planning issues. Help participants address this risk by assessing the appropriateness of offering a diversified inflation option within the Plan.
6) Help Participants Sleep at Night: Financial wellness can promote a more productive workforce
Employees face significant financial burdens throughout their working lifetimes, from home buying to college saving to retirement preparation. Helping them put their financial house in order not only helps them save for retirement, but can also improve engagement and decrease stress levels.
7) Address the Diversification Challenge: Consider implementing custom funds to increase participant diversification while keeping the investment line-up lean
In an effort to avoid participant confusion and investment choice overload, 60% of plan sponsors offer participants fewer than 15 investment choices and many are looking to reduce that number to 10 or less . Custom funds can provide participants with access to greater diversification through exposure to alternatives, opportunistic fixed income and real asset strategies without adding complexity to their investment decision-making process.
8) Reassess the Market: The evolution of the DC market has driven changes in vendor position, strategy and focus.
How long has it been since the plan was put out to bid? In response to market pressures and financial constraints many vendors have changed their strategy and target market. At the same time, plans have grown, and their needs evolved. It may be time to explore what is out there.
9) Think Beyond Borders: Globalization is here
International markets make up a larger percentage of the investable universe than US markets. Delivering streamlined access to global investment opportunities across the asset class spectrum helps address participant behavioral biases, leading to improved asset allocation decisions and ultimately enhanced retirement outcomes.
10) Keep Pushing the Communication Envelope: Employees are accessing information in new ways. Are plan communications keeping pace?
Employees are increasingly using mobile technology, and the best communicators are engaged in generational targeting and strategies based on behavioral finance. Looking ahead, the success of gamification in education and employee training can be applied to retirement and financial education. Assess how new approaches to communications and targeting can more effectively reach the various populations within the plan to help drive engagement.
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting.
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