10 steps DC plan sponsors should take in 2013
January 14, 2013 2:50 PM
1. Define success
A successful DC plan hinges on four factors: increasing participation, increasing the savings amount, investing appropriately and spending wisely. Employers can optimize their plans through skillful, intentional intervention based on the plans demographics and employee behavior. Costs should be minimized where appropriate to increase the value of each factor.
2. Recalibrate your default option
Reevaluate the level of auto-enrollment, auto-escalation, and re-enrollment in driving participant behavior, with the goal of accumulating sufficient retirement assets. The default investment option should provide a professionally managed, well-diversified, single option solution for participants who cannot or do not want to make asset allocation and rebalancing decisions on their own. Review the appropriateness of your default option for your unique participant population.
3. White label your investment choices
Many participants build their portfolio based on an investment options name recognition (manager selection) rather than focusing on asset allocation. Consider white labeling your investment options - unbranded and custom - designed for the plan. A custom approach allows you to offer fewer investment options by building a well diversified portfolio that otherwise may be difficult to offer on a standalone basis. You also have the flexibility to add or replace managers without the communication and administrative headaches with a branded option.
4. Communications: Maximize your impact
Many plan sponsors offer a tiered investment structure to help participants make better investment allocation decisions. Make sure the investment options are communicated by tier in the participant education/enrollment materials and on the plans website/on-line tools. Assess the best delivery system, and sock it to 'em.
5. Anticipate the impact of adding income projections
Participants cant relate to large lump-sum amounts in the distant future. Tell them how much monthly income, in todays dollars, they can expect in retirement given their current balance, contribution rate and years to expected retirement. Educate on how actions they take now may impact that outcome.
6. Develop spend-down strategies for happy retirees
Handing retirees a lump sum check and wishing them good luck doesnt cut it. While wed all like more developed retirement income tools and additional regulatory guidance, we cant put our near-retirement employees on hold indefinitely. Its time to start crafting real solutions for the spend-down challenge.
7. Complete a compliance audit -- the IRS is watching
With so much governance focus on fees, many plans have gone for years without a compliance audit. With both the IRS and the Labor Department increasing their focus on compliance, now is a good time to remedy that. Best practice includes checking all documentation and communications, as well as administration and transactions.
8. Know the limits of your recordkeeper's role
While it may be convenient to let your vendor take charge of your plan, never forget that when the DOL, IRS or plan litigator comes knocking, it will be at your door, not your recordkeepers. You need to take control of your plan and ensure that decisions are made from an unbiased point of view.
9. Focus on fees
New fee disclosure regulations - 408(b)(2) and 404(a) - have led to increased scrutiny of all plan fees. Review and benchmark investment and recordkeeping fees separately, rationalize the fee allocation methodology and document your review process to support a strong governance framework and help defend against excess-fee litigation. Evaluate moving from mutual funds to collective trusts and/or separately managed accounts in order to reduce investment fees.
10. Assess your advisory relationship -- it's not all or nothing
Appointing an adviser to provide discretionary delegated solutions for a plan in its entirety, or for select investment options within a plan, transfers more fiduciary responsibility to the adviser and may result in time savings for management as well as the potential for increased diversification, improved performance and decreased costs. Determining which governance structure is right for you is a critical component of the DC plan management process.
