10 ways sponsors can help employees put their house in order
By Paula Aven Gladych
Sponsors of defined contribution retirement plans must focus on retirement outcomes that help participants meet their objectives and manage their risk, according to a 2014 forecast by Mercer.
Helping employees put their financial house in order has bottom-line advantages for their employers, the company said, but managing litigation, audit and public-relations risk has become more complex. The upcoming year will see many changes, including 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 they have become the primary savings vehicle for many U.S. workers.
Mercer recommends that DC plan sponsors take the following 10 steps in the new year:
1. Redefine success. A plan is successful if it meets plan sponsor objectives and delivers future financial security to participants. Mercer suggests moving beyond flat metrics such as participation levels and deferral rates. Instead, analyze all participant behaviors that drive retirement outcomes, and develop sophisticated metrics and interventions to improve those outcomes.
2. Take a broader, sophisticated approach to investment risk. Support employees by tailoring the plan’s investment risk profile to participant demographics. If you have limited resources, consider 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 Department of Labor has stepped up oversight of TDFs, which have become very popular within defined contribution retirement plans. 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. Mercer believes that 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 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, Mercer said. 5. Help participants sleep at night. Help employees put their financial houses in order to not only help them save for retirement, but to improve engagement and decrease stress levels.
6. Consider the impact of inflation on participants’ retirement readiness. Despite the low interest rate environment from 2000 to 2013, participants’ purchasing power decreased by more than 20 percent, 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. 7. Address the diversification challenge. Mercer recommends that plan sponsors consider implementing custom funds to increase participant diversification while keeping the investment line-up lean. Having too many investment options can be confusing. Mercer believes plan sponsors should reduce those options to fewer than 10. Custom funds can provide participants with access to greater diversification through exposure to alternatives, 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. Figure out how long it has been since you put your retirement plan out to bid. Plans grow and their needs evolve. It may be time to explore the available options, Mercer said. 9. Think beyond borders. International markets make up a larger percentage of the investable universe than U.S. 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, according to Mercer.
10. Keep pushing the communication envelope. Assess how new approaches to communications and targeting can more effectively reach the various populations within the plan to help drive engagement.
Originally published on BenefitsPro.com