ERISA requires plan fiduciaries to act prudently under circumstances then prevailing with respect to their qualified employee benefit plans. This process is commonly referred to as procedural prudence, and plan sponsors would be well-served to include it in their plan decision-making process, in light of todays increased emphasis on fiduciary obligations.
Fiduciaries who select investment menu options have many factors to consider. Such factors increasingly include plan participant demographics, which today means far more than participant ages and retirement timeframe.
The growth of target-date funds as a predominant choice on plan menus may lead some plan sponsors to assume that their plan must include a suite of TDFs. Indeed, TDFs may be an appropriate option for many plans. After all, multi-asset class investment options like TDFs are an important tool for participants who would rather not self-select a stock and bond mix from a seemingly complex menu. A fiduciarys decisions around investment plan menu is less about what other plans offer, and more about what is in plan participants best interests.
The DOLs 2013 Tips for ERISA Plan Fiduciaries encourages fiduciaries to engage in an objective process to obtain information that will enable them to evaluate the prudence of any investment option made available under the plan. In addition, demographic factors such as age, planned retirement dates, salary levels, turnover rates, contribution rates and withdrawal patterns can assist fiduciaries in their investment menu selection.
Rather than simply relying on manager evaluation tools, plan sponsors need to consider unique characteristics of their participant population to make appropriate investment menu selections. For longer-term planning, sponsors may want to evaluate projected participant populations over the next five to 10 years to ensure that the retirement plan will continue to serve participants need into the future.
Some demographic factors to consider:
Average participant age: Boomer, Gen X or millennial?
Generally, the longer the investment time horizon, the greater amount of flexibility the participants may have to pursue a growth-oriented investment objective. In addition to considering the current average age of the participant base, plan sponsors may want to seek out information regarding age trends in their workforce in order to gain an understanding of what to expect five to 10 years down the road.
Average retirement age: 50s or 60s?
The average retirement age may provide an indication of whether a relatively conservative or growth-oriented objective is most appropriate.
For example, a plan with an average retirement age younger than 63 suggests that participants have fewer years to contribute to the plan, and a greater number of years for which they will need retirement income. As a result, a relatively conservative objective may be appropriate.
A plan with an average retirement age older than 67, meanwhile, suggests that participants have a greater number years to contribute to the plan and fewer years for which they will need retirement income. All else being equal, participants may have the flexibility to pursue a more growth-oriented investment strategy.
Age dispersion: Wide or narrow?
The degree of age dispersion among participants can help determine if a single balanced or risk-based option would meet the needs of the plan as a whole, or if multiple options might be required. If a plan consists of participants spanning the age spectrum, a suite of TDFs may provide the range of investment objectives necessary to meet the plans needs. If a plan has a large percentage of participants who share a similar investment time horizon, the use of a single risk-based option may provide an appropriate investment objective for the plan as a whole. Again, a plan sponsor may wish to review projected data as well as current information in order to plan for a changing workforce over the next five to 10 years.
Contribution rates: High or low?
Review the plans existing contribution rates and distribution behaviors to see if participants are saving amounts in line with industry retirement readiness standards. This information should be viewed together with the other data for a more complete picture of the risk capacity of a participant population.
Growing emphasis on fiduciary standards gives plan sponsors every incentive to assess their plans demographics when making investment menu decisions. Aligning investment menus with plan demographics can serve two important goals: ensuring a procedurally prudent process and paving the way to plan success.
Cindy Lapoff is an ERISA compliance consultant for Manning & Napier Advisors, LLC. She provides clients and consultants guidance on the Affordable Care Act and other regulatory and case law developments affecting single employer and multiemployer plans.
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