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Sponsor News - December 2012

Plan sponsors on retirement readiness: You can only lead a horse to water

By Employee Benefit News - Editorial Staff
October 4, 2012
Towers Watson this morning released survey results showing that, despite increased involvement in 401(k) and other defined contribution plans, most U.S. employers lack confidence in the retirement readiness of their employees.

Of the 371 American employers that offer a 401(k) plan as a principal DC retirement option surveyed by Towers Watson, 56% say employee participation levels are at least 80% this year, up 6% from 2010. Most of that increase can be traced to automatic enrollment, which is featured in 65% of respondents’ plans this year, compared to 51% in 2009. Seventy-one percent of those who use auto-enroll also use automatic increase, Towers Watson finds.

Still, Towers Watson reports that plan sponsors fear their DC plans are both underused and poorly understood by workers. Only 26% of respondents think their employees have reasonable expectations about what DC plans can provide and even fewer (22%) say employees usually make informed calls on their retirement savings.

Forty-eight percent of those surveyed believe a larger proportion of older workers will delay retirement.

“Plan sponsor confidence is severely lacking in retirement readiness,” says Robyn Credico, a senior retirement consultant at Towers Watson. “While employers continue to offer various communication vehicles, education and advice tools, and have made recent strides by automating retirement plan savings features and offering investment choices that help employees diversify their savings, it appears that the intended impacts of these moves have fallen short of their goals.”

All is not lost though, TW experts say. “There are several steps employers can take to help their employees generate an adequate income at retirement,” says the firm’s Alec Dike. “These include enhancing communication efforts to provide employees with a better understanding of how DC plans work, including how much to save, investment options, risk and return, and how to monitor and adjust assets.”

To that end, plan sponsors are streamlining investment options, TW finds, perhaps in an effort to overcome participant inertia. In 2010, 32% of DC plan sponsors surveyed offered 20 or more options, down to 24% this year. Most offer between 10 and 19 options and nearly half offer a brokerage window as an option.

However, the use of annuities also has declined. Just 6% of respondents currently offer a lifetime income distribution option and of those, 82% report that less than 5% of participants elect it. Some 45% offer the option only at the time of retirement, and the plan is responsible for the lifetime income distribution.

Seventy-four percent of respondents say the most prevalent reason for offering a DC plan is to offer participants an adequate retirement at a reasonable age; a majority indicate the top three issues driving plan design are benefit competitiveness, plan cost and attraction and retention.

408(b)2 fallout - So we know our fees. Now what?

By Chris Carosa
October 3, 2012
There are some philosophical questions that just can’t be answered. “If a tree falls in the forest, would anyone hear it?” “What if you threw a party and no one came?” “If you disclose 401(k) fees to participants and they can’t do anything about it, does disclosure matter?”

The popular media simply loves to write stories about the fees paid by 401(k) plans and their participants. Its only natural they’ve been delighted by the DOL’s Fee Disclosure Rule (408(b)-2) that became effective July first of this year.

Sometimes they go so far as to imply it’s better to pay no fee at all. Of course, we all know why this isn’t in the client’s best interest (and if you don’t know why, then read “What’s a Fair Fee to Pay a Fiduciary ").

Beyond all the hubbub concerning the ultimate fee level, a much more intriguing matter confronts us. Once the plan sponsors (and, eventually, the participants) receive this new fee information, what’s to be done with it?

Clearly, 401(k) plan sponsors are in a position to actively address any potential fee issues, but how do they know if an issue even exists? We recently surveyed our 4,000-plus subscribers on this topic. They told us even though they believed nearly all plan sponsors knew of the new Fee Disclosure Rule, a sizable portion of those plan sponsors would not know how to interpret the data provided.
This lack of clarity comes down to one serious omission on the part of the DOL. The regulator, although it promised, failed to provide a template for service providers. Many of our survey respondents felt the DOL should address this and that any template be limited to one page containing a specific itemization of a specific fee for a specific service and whether those fees are directly or indirectly paid for.
Contrast this “ideal” report with the 15-25 page reports we see now. Making the situation worse, these voluminous tomes often also enclose very long URLs readers must go to in order to find the final answer.

The other thing currently lacking is perspective. How would a plan sponsor know if he’s paying above normal, below normal or right in the middle vs. his peers? Again, the survey respondents suggested the template include a benchmark number. Great idea! Only one problem – no reliable source for benchmark numbers exist.

Unlike mutual funds, which are all required to file standardized data semi-annually and whose data can then be aggregated by companies like Lipper, the annual 5500 filing by 401(k) plans does not contain a consistent reporting format that can be easily aggregated to obtain dependable benchmark numbers.

So, 401(k) plan sponsors and soon their participants will know their 401(k) fees in great detail. Now what?

We realistically cannot expect informed action on the part of plan sponsors unless and until they gain perspective. That means creating a reliable benchmark database that doesn’t rely solely on optional self-reporting.

Allow me to humbly suggest to the DOL the following next steps:
1) Update the form 5500 to include audited fee data, by service provider and identifying whether those fees are paid directly (either through the plan or by the plan sponsor) or indirectly (e.g., through 12b-1 fees, revenue sharing, etc…).

2) Create a one-page template for all service providers to submit to their plan sponsor indicating what fees were paid for what service and whether those fees were paid directly or indirectly.

3) Using the submitted 5500 data, provide an online aggregate benchmark for all to see and use.
There. That was easy!

Education/Advice:Roths Revisited

If your plan doesn’t offer a Roth 401(k), it’s time to reconsider

According to the 2011 PLANSPONSOR DC Survey, the most surprising trend was a huge increase in the offering of Roth 401(k)s—38.2% of all plans include a Roth savings option in their 401(k) plans. While that is an increase over the 2010 figure (20.2%), it is a small one when compared with the high percentage of sponsors offering traditional defined contribution (DC) plans.

With participant retirement savings continuing to be an issue, plan sponsors have tried everything, from education to auto-enrollment to employer matches, to increase participation and savings rates. Adding a Roth savings opportunity to the 401(k) plan might provide another incentive for some straggling employees to opt in.

So why are more plans not utilizing the Roth 401(k)? Here are some good reasons to reconsider this option:

  • Free money from the government. Any earnings on a Roth 401(k) are tax-free after a five-year holding period, as opposed to a traditional 401(k), in which all funds, including earnings, are taxable upon withdrawal;
  • Another option for participant tax planning. No one knows what the tax structure will be for participants when they reach retirement. With Americans working longer and taxes getting higher, a retiree could very well pay more in taxes when he starts 401(k) withdrawals than he would at today’s rates;
  • Required minimum distributions (RMDs). Although RMDs are required of all employer-sponsored retirement plans, when a participant leaves your employ, he can roll the Roth 401(k) into a regular Roth individual retirement account (IRA). RMDs are not required from regular Roth IRAs while the owner is still alive; and
  • Generation Y participation. Fidelity’s 2012 second-quarter analysis of its 11.9 million 401(k) accounts found that, in plans that offer Roth 401(k)s, usage of this savings option is greatest among Gen Y employees.

In this month’s Know How, we show how a Roth 401(k) option in your plan can be of great benefit to participants.

2 steps to reduce 401(k) fiduciary liability

By Chris Carosa
October 17, 2012
What’s the biggest concern most 401(k) plan sponsors have about their fiduciary duty? It’s not making sure deferrals occur on a timely basis (they hire good people to make sure that happens).

It’s not making sure their employees invest enough for retirement (yeah, that worries them, but it’s not at the top of the list). It’s not even that they’re paying too much in fees (let’s not even go there).

No, the cause for high anxiety among 401(k) plan sponsors – whether they say it out loud or keep it to themselves – is the gnawing worry they’ve allowed the wrong investments to populate their plan’s menu options. Here’s the irony: This is the easiest portion of their fiduciary liability to mitigate (see “The Easiest Way to Reduce Personal Fiduciary Liability for Plan Sponsors and Other Non-Professional Trustees <> ”).
It really takes only two steps to accomplish this, and most 401(k) plan sponsors either are already doing the first one or are under the mistaken impression they are already doing the first one.

Here’s what I mean. From what the legal folks tell me, under both the Uniform Prudent Investor Act and the DOL regs, someone serving as a plan trustee (or fiduciary) who does not have the credentials to be considered an “expert” regarding selecting investments, can allay their fiduciary liability for this function, but only if they hire a recognized professional to take on that specific fiduciary role.

In other words, if you’re a doctor, a lawyer or an Indian Chief (i.e., a non-expert when it comes to picking investments), you reduce your personal fiduciary liability for picking plan assets by hiring a professional investment advisor to assume the job of selecting and monitoring plan investments.

There, that was easy.

Or was it?

Notice the caveat in there. In order for the plan sponsor to lower his own fiduciary liability, he needs to hire another fiduciary. Thanks to dual registration, this can be a confusing distinction. The plan sponsors needs to make certain the individual (or firm) he hires will accept the role as a fiduciary. Fortunately, we know all SEC-registered investment advisors are, by definition, fiduciaries.

The same, unfortunately, is not true for other financial service professionals, including brokers who are dually registered as investment advisors. In the case of hiring a dually registered investment advisor, the plan sponsor must ask the vendor which hat he’s wearing – and then make sure the investment management agreement specifically states the advisor is acting as a fiduciary as defined under ERISA.
Anything less than that, and the plan sponsor cannot say with certainty he has hired a fiduciary And if the plan sponsor cannot say with certainty he has hired a fiduciary, he cannot say with certainty he has lowered his own personal fiduciary liability. And that, my friends, is the whole point, isn’t it?

I said there were two easy steps. The second step, while often neglected, is, again, fairly simple. It comes down to one word: documentation. This article is too short to provide a thorough explanation of what is required of documentation, but suffice it to say the plan sponsor needs to document all his investment processes, including those involving the hiring and monitoring of the investment advisor and those involving the selecting and monitoring of underlying investment options.

The DOL has long said, rather than picking the “perfect” investment menu, it's more concerned with insuring plan sponsors have well defined processes and that they execute them consistently.

And it’s easier to comply with this than most 401(k) plan sponsors allow themselves to believe.

Are 401(k)s still part of the package?
Yes … with some changes

By Holly Smith Peterson

In the economic heydays, employees stayed with one company for a lifetime – and that company provided a full-scale retirement package that encouraged workers to save.

In recent years, though, incentives like matching 401(k) contributions and employer-directed investments have often gone by the wayside – as businesses jettisoned expenses to save the company as a whole.

But now there’s some good news: With a more risk-controlled focus, companies are back in the 401(k) business.

“I think that downward trend has pretty broadly reversed itself now,” said Jeff Albers, vice president of Albers & Co. in Tacoma. “Of the companies that were providing 401(k)s in the first place, not too many eliminated their plans. And we’ve started seeing more employers reinitiating contributions.”

The driver, he said, has been a refocusing on risk control in uncertain times, as well as a rebalancing of employee responsibility for retirement investments and health care.

“Companies are having employees share more of the health care costs because that industry is so unpredictable,” Albers said. “So, what many are (telling their) employees is that, while they’re indeed having to pay more for health care, they’re gaining back matching funding in their 401(k) plans.”

And 401(k) plans are growing across the nation as the choice for businesses to provide retirement security to employees. Over the past three decades, while defined pensions have dropped 80 percent, according to, assets in 401(k)s have grown to 16 times the amount they were during the same timeframe.

That’s a total of $4.3 trillion that workers have in this type of contribution plan – three times the $1.6 trillion Americans hold in annuities.
Brad Berger, managing partner at Cornerstone Financial Strategies in Tacoma, said one of the main reasons that companies have chosen to hold onto this benefit, or are now reinstating matching contributions, is to keep good workers.

“Particularly for small businesses, it’s one of the key retention factors for employees,” he said. “While during the recession companies were forced to let some people go, they want to retain those who are of value because the cost to retrain new employees is very prohibitive.”
Another pattern on the uptick that Berger has seen is a rise in Roth 401(k)s, as well as a restructuring of the overall choices companies are allowing workers to make for their investments.

“It often was that individuals were using it like a sort of gambling game, but that rarely works out,” he said. “So, companies are taking away more of the fringe choices and putting in more core choices and target funds.”

However, Berger said that whatever the opportunities, businesses should have a 401(k) plan in place for employees. And he emphasized that there are more qualified financial advisers than ever before to help with the planning.

“Although some employers out there still think setting up a 401(k) is a daunting task, it really isn’t,” Berger said. “And a lot of people consider this a real value.”

In Lewis County, where Jeff Holman Insurance helps more than 200 regional businesses create retirement plans for their employees, owner Jeff Holman said that 401(k)s and matching investments have remained in place.

The difference now, he agreed, is that companies are turning not only toward less risk, but also more worker control of the plans.
“More of the responsibility for investment decisions is moving from the employer to the employee,” he said. “That way the employee can say, ‘This is my decision; I’m the one directing my own funds.”

But where will business plans for employee retirement investments go from here? Holman said a lot depends on the upcoming election.
“People are waiting to see what taxes and regulations and other issues are going to be,” he said. “So, in about four weeks, I can tell you.”