In 2015, Mercer expects that plan sponsors will focus on leveraging their DC plans to achieve a competitive advantage in attracting and retaining talent. Plan administration and governance will continue to be a focus of regulators from the Department of Labor (DOL), SEC, and IRS as well as plaintiff’s counsel representing participants. In this environment, Mercer has defined ten steps that DC plan sponsors should take in 2015 to mitigate fiduciary risks and provide participants with access to solutions that meet their long-term retirement needs.
1. Evaluate the impact of competing financial priorities on employees’ ability to prepare for retirement.
At a time when employees are being asked to take more responsibility for their benefit decisions, a variety of programs, messages and tools may support or alternatively compete with the organization’s retirement initiatives. Financial behaviors outside of work have an impact – either positive or negative – on the success of your company’s work-based programs and your employees’ overall financial wellness. Consider how to enhance programs to promote an increase in employees’ knowledge of their current individual financial situation and their longer term financial needs, allowing them to optimize their payroll-deduction spend across the organization’s range of benefit offerings.
2. Examine options designed to respond to participants’ retirement security needs.
With the continued shift from defined benefit to defined contribution plans as the primary source of retirement income, DC plan sponsors should be prepared to respond to favorable regulatory changes (increased guidance on the use of in-plan annuities), product innovations (services promoting social security optimization), and heightened legislative awareness that are shifting the retirement income landscape. Preparation will require the study of options currently available to your participants, analysis of these options to determine which solutions are appropriate given your plan demographics, and call for innovative solutions to meet the needs for which solutions do not currently exist. By taking these steps you will help put your participants on the path toward achieving their retirement security needs.
3. Conduct an in-depth analysis of your current, or future, managed account provider.
The selection and monitoring of a managed account provider can present fiduciary risks at least as great as the selection of an individual fund manager, albeit in a product with significantly greater complexity. Heightened scrutiny of managed account services by regulatory authorities, including the Government Accountability Office’s recommendation to the DOL to conduct an in-depth review of managed account providers, should have plan sponsors re-evaluating and implementing more comprehensive processes for selection and monitoring of these providers. It is essential plan sponsors understand and adhere to ERISA-mandated selection and monitoring processes for managed account services provided to participants; documentation of this process is a critical component of managing fiduciary risks.
4. Design a structure that is based on the investment behaviors of your participants rather than general market assumptions.
The plan’s investment structure should be based on the investment behaviors of your plan participants rather than general market assumptions. The use of general market assumptions to determine the appropriate plan structure for your participants, while common, may not adequately support employees’ ability to meet their retirement goals. Additionally, the market-based structure may impair participants’ ability to navigate periods of market or economic volatility. Intelligently designed investment structures can increase participants’ chances of success. For example, the use of white-labeled funds can lead to broader asset-class exposures and lower volatility for participants without dampening expected rates of returns. Conduct a review of your plan demographics to determine if the current investment structure is designed to meet the needs of your participants.
5. Monitor participants’ progress against their retirement goals.
Effective talent management and an individual’s perception of retirement security have an important thing in common – they both require an understanding of retirement preparedness. If employees are falling significantly short of their personal goals as they near retirement, the organization may experience talent management issues impacting the next generation of critical talent. DC plan sponsors that evaluate participants’ progress towards their retirement goals and proactively intervene where gaps exist are better able to execute an effective workforce strategy.
6. Reconfirm the capital preservation option in your DC plan remains the most appropriate for participants.
Capital preservation options (most commonly money market and stable value options) have played, and will continue to play, an important role within DC framework. Over the last few years, new fixed income products have entered the capital preservation market. Effective in 2016, increased SEC regulations are being imposed on money market funds. Given the significance of these changes it is important that plan sponsors review the capital preservation option selected as the designated investment alternative within the DC plan and document the appropriateness of this option for your participants going forward.
7. Consider the impact disability could have on employees’ ability to accumulate funds for retirement.
Saving for retirement throughout one’s career is a primary driver for achieving successful retirement preparedness. Historically, employees faced with health issues resulting in disability leave have been unable to save in the company sponsored plan while on leave. The relative importance of this gap has increased with the decline of defined benefit plans where periods of disability typically have a minimal impact on benefit accruals. New regulations that allow continued contributions during periods of disability create an opportunity to close an often overlooked gap in participants’ retirement planning. Assess this new opportunity’s potential impact on your employees and consider a strategy to intervene.
8. Customize the plan’s auto-features to improve participant outcomes.
Automated design features have become accepted practice, with automatic enrollment leading the way. Employers with multiple years of experience in this environment are recognizing that while outcomes have improved, there is still work to be done. The next generation of design customizes the plan’s auto-features to engineer positive change based on the needs of different demographic segments. For example, an organization choose to differentiate auto enrollment rates to achieve higher levels of saving among mid-career employees while younger employees struggling with a variety of financial demands may be better served with lower initial contribution levels. Understanding the needs of the employee population allows sponsors to customize and better align the plan auto-features to accomplish participants’ short and longer-term needs.
9. Consider the appropriateness of liquid alternatives within the plan.
Last year’s significant growth of liquid alternatives, such as diversified inflation, hedge funds, and absolute return strategies, has led to increased regulatory scrutiny of these options. The inclusion of these alternatives in DC plans is not new; in fact, many target-date funds have existing exposure to these options. It is vital that plan sponsors review how these liquid alternatives are defined, reviewed, implemented, and monitored within the plan. Determine whether there is current exposure to these vehicles within the plan’s existing investment vehicles, confirm these exposures are appropriate for participants based on what is available in the market today, and identify whether or not additional exposure to liquid alternatives should be considered.
10. Complete an annual four-point tune-up of design, fees, operation, and compliance.
With the heavy reliance organizations and employees place on their defined contribution plans, it is critical that each aspect of these plans runs at peak performance. Plan sponsors should conduct an annual review covering plan design, fees, operations, and compliance to identify the plan’s potential weak spots, and take steps to address issues as appropriate. Proactively monitoring these areas on an annual basis will help mitigate risk and improve the performance of the plan.
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 130 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. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.