Jason Shapiro, Investment Consultant, Willis Towers Watson
In the 10 years since the passage of the Pension Protection Act (PPA) in 2006, the structure of defined contribution plans has evolved significantly. At the same time, the role of these plans has shifted from supplemental savings vehicles to serving as the primary source of retirement assets for many employees. In this article, I will highlight 10 key actions plan sponsors should take in the coming year. The first five actions will help you get “back to the basics” by reevaluating existing governance structures and processes currently in place. The remaining five actions will help you get “back to the future” and use best practices to evolve.
Please note that I have included several considerations that will not be appropriate for every plan and should be evaluated as part of a discussion with your plan consultants.
Ensure your governance structure reflects plan objectives. The changing role and increased complexity of DC plans means that historical governance structures may be insufficient. You should determine the appropriate internal/external resources and time to commit. Also, consider merging investment and administrative committees to create one body that aims to provide maximum flexibility to address benefit needs and maximize the likelihood that participants achieve successful retirement outcomes. Subcommittees are then useful for delegating specific activities. For more information, I recommend reading the results of the 2016 Willis Towers Watson U.S. Retirement Plan Governance Survey.
Delegate implementation decisions to leverage your internal governance resources. We believe optimal governance is critical for successful DC plan management. Internal resources can be deployed more efficiently when certain tasks are delegated to an external partner. Sponsors should consider which activities (e.g., manager selection, administrative operations) can be outsourced to focus more committee time on strategic decisions (e.g., plan design, communication strategy). Delegating investment decisions has the added benefit of another provider taking on fiduciary responsibility alongside the committee.
Set strategic objectives for your committee and establish metrics for measuring success. Clearly defined beliefs, goals and objectives are critical for effective decision making. For example, what is the desired level of paternalism for your committee? Conduct an investment beliefs survey and discuss and document the outcomes. When goals include maximizing retirement readiness outcomes, a tool such as Willis Towers Watson’s FiT AgeSM provides sponsors with a more robust way to benchmark their plans and evaluate potential levers to improve outcomes.
Establish/Enhance your process for reviewing plan fees. Fiduciary risk continues to rise given the accelerating pace of lawsuits aimed at DC plan sponsors. Most of this litigation includes claims of excessive fees paid for investment management and/or administrative services. Sponsors should ensure appropriate processes exist to periodically monitor and assess that all plan fees are reasonable.
Update your policy documents. Most committees have an investment policy statement in place but often fail to realize that these documents can actually increase risk if not structured properly. Policy documents can be used against fiduciaries during litigation if not followed precisely. We recommend rewriting documents to avoid overly prescriptive language that dictates what a committee “should,” “must” or “shall” do in a given circumstance. Additionally, consider establishing a distinct fee policy statement that addresses your process for allocating and reviewing plan fees.
Take auto-features to the next level. The use of auto-features has grown tremendously since the passage of the PPA 10 years ago, but the current features leave plenty of room for improvement. The next generation of auto-features includes extended match structures, custom default rates based on age and auto-enrollment to Roth instead of pretax contributions. The optimal design will vary by plan, and sponsors should evaluate auto-features in the context of their plan objectives; some features (e.g., auto-enrollment without pairing with auto-escalation) may actually impede success.
Develop an engagement strategy to improve participant behaviors. With five generations in the workforce together, engaging with participants is more difficult, and more critical, than ever. Historical communication strategies were broad-based and non-targeted. Best practice in 2017 involves smarter communications that leverage our knowledge of participant behavior and financial decision making. Communications should be outcome-focused and generationally targeted. Employee segmentation analysis allows sponsors to develop targeted communications tailored to at-risk participants based on their unique behaviors.
Consider alternative default investment options Target-date funds (TDFs) remain the dominant QDIA with tremendous asset inflows in recent years. TDFs represented 46% of DC contributions in 2015, highlighting the importance for sponsors to review the appropriateness of their funds. Sponsors should follow U.S. Department of Labor guidance to review their TDF glide path and consider custom solutions. In particular, we encourage sponsors to consider hybrid QDIA solutions that combine TDFs with managed accounts for different participant groups.
Evaluate lifetime income solutions to improve financial security for participants in retirement. As the lifetime income solution landscape evolves, plan sponsors are slowly embracing options to help employees improve their financial security in retirement. While participant demand for these solutions remains low, we suspect this will change as longer life spans and historically low rates of return on retirement savings cause longevity risks to spike. We encourage sponsors to remain educated on current offerings and to press for more robust solutions in the future.
Safeguard your participant data. Hackers are eager to gain access to your participants’ benefit plan data, creating the potential for unwanted publicity and significant liability. Beyond your enterprise-wide security efforts, you should determine whether your recordkeeper is contractually obligated to protect you and your participants, and evaluate what insurance coverage you and your recordkeeper maintain. We believe a strong contract should include commitments to treat your participants’ data with at least the level of care that your recordkeeper treats its own data.
Jason Shapiro is an investment consultant at Willis Towers Watson and a member of the firm’s Defined Contribution Steering Committee. His areas of responsibility include investment strategy, asset allocation, risk budgeting, manager structure and investment manager research.