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I’m A Fiduciary – What You Talkin’ About?

Personal Deduction Planning

Am I Having Enough Withheld?

Choosing an Income Tax Filing Status

An Ironic Twist to 401k Fee Lawsuit Settlements

Is Your Corporate Retirement Plan a “Fixer Upper”?

Matthew R. Cellini, AIF®

I don’t know about you, but it seems like winters here in the Northeast tend to get longer each year. I find myself counting down the days to summer after Labor Day weekend. The silver lining among the loss of daylight hours and the extra layers of clothing is a warm couch and a binge-worthy TV show.

This winter I chose to invest quality couch time with the popular HGTV hit “Fixer Upper.” The Waco, Texas based-couple turns some of the most disastrous homes into custom, magazine-worthy masterpieces. What I find most appealing about this show (other than the obvious before and after results) is the couple’s vision for incredible potential.

It takes experts like Chip and Joanna Gaines to see the disarray of terrible paint colors, shag carpet, or poor overall structural support of a “fixer upper” home as a potential to be the best house on the block. I couldn’t do it! Of course, in every industry, there are people who are able to identify the potential for greatness, even when mediocrity looks to be the norm. And despite my lack of vision for custom remodeling, this admirable concept of greatness from mediocrity can be applied to retirement plans.

It takes consistent dedication and TLC to maintain the “curb appeal” of a home despite decades of use. The same can be said of most 401(k) and 403(b) plans. In times past, the fee structure may have made sense, the plan design was industry-standard and the plan investments met the needs of participants. Perhaps the oversight or “maintenance” of the plan was also done on a regular and timely basis. But fast forward to today and many companies have a plan that looks more like the potential fixer-upper down the street.

With the disappearance of pension plans, now more than ever participants are using their workplace retirement plan as the primary vehicle for retirement income (as we see fewer and fewer pension benefits) and they rely heavily on your company to make sure your plan is being well-maintained. Coupled with the increased scrutiny by the Department of Labor (DOL) and exposure to litigation, a retirement plan that shows signs of wear and tear can become a real liability for your company and your plan fiduciaries who are responsible for taking care of it.

If your company is stuck with a “fixer-upper”, here are three areas to consider to get your plan back to its prime.

Revenue Structure

As the retirement plan industry has evolved, the way plan expenses used to be paid has fallen out of style. Historically, most retirement plans used indirect compensation methods like revenue sharing to offset the cost of recordkeeping and advisory services. While this method was a common way to pay administrative and operational expenses in previous generations, a direct and transparent approach is now more popular (and safer!).

Funds that provide revenue sharing generally require the use of higher cost share classes that have become a target of ERISA litigation. Also, revenue sharing is “asset-based” which means that costs grow in lock-step with the assets and make it challenging for companies to leverage economies of scale and negotiate lower costs as its plan grows.

Furthermore, most recordkeepers are now willing to price on a per-participant basis which can help drive down your plan costs over time as plan assets grow. Also, consider utilizing a recordkeeper that is open architecture, fund agnostic and does not have any proprietary fund requirements. Why should the plan be tied to using investments that may not be suitable for your demographic?

Here are two strategies to consider:

  1. Ask your recordkeeper to provide a quote for the recordkeeping services that is per-participant and not asset based. Also, ask your recordkeeper to provide the per-participant quote assuming no proprietary revenue to be included in the plan moving forward. Moving to a per-participant fee structure will allow for the plan costs to decline on a percentage basis as the plan continues to grow through employee and employer contributions.
  2. Evaluate your investment options in the plan and determine if you are using the lowest cost share class possible given the asset size. In addition, determine if there is a share class that does not include revenue sharing. By removing revenue sharing from the plan it will ensure all of your plan costs are explicitly stated, pre-negotiated, and paid pro-rata from participant
    accounts in a transparent manner.

Vendor Fit

The technology of our world today evolves at a faster pace than ever before; which becomes immediately apparent when I encounter my five-year-old niece operating an iPad. If you have been with your current vendor for several years, it may be beneficial to evaluate other options, if for no other reason than to see what else the marketplace currently offers. Vendor capabilities have greatly evolved. The usage of mobile technology is increasing and the technology geared towards participant engagement has become extremely effective. For example, many retirement plan vendors now have mobile apps that allow people to perform most account functions right from their smartphone.

Plan Design
Corporate retirement plans are quickly becoming the most primary savings vehicle for most Americans. According to a 2017 study, approximately 57% of Americans have less than $1,000 in savings, and nearly 39% of Americans reported having no savings at all. While these statistics are disheartening, plan sponsors have a real opportunity to bring their plan design into 2018 and improve those statistics.

Automatic enrollment and automatic escalation provisions have continued to be the two biggest drivers of increased participation and deferral rates; interestingly, studies have shown that opt-out rates for plans with automatic features are much lower than you might think.

Loan provisions are another area that can be problematic, both for your participants and your company. Loans can often be detrimental to participant outcomes by impairing savings rates, creating tax issues and reducing investment returns. In addition, loans can be a source of considerable operational and administrative problems that need to be monitored and corrected. Across the industry, more companies are making loan provisions more restrictive and it may be wise to reassess your loan policy to ensure participants are not impairing their long-term retirement outcomes.

If you haven’t taken a thorough and objective look at your plan design, now is a good time to give it some love and attention. You would be amazed how small tweaks can make a significant difference in outcomes for your employees.

Transforming your fixer-upper retirement plan to the envy of the neighborhood is obtainable. Consider laying out a plan to tackle a few of these areas as you move into the second or third quarter of this year. And when in doubt, ask for help. My team and I are happy to assist and can utilize our proprietary tools to analyze, cast a vision for the future, and ensure your plan has the maintained “curb appeal” it deserves.