Many retirement plans are at risk of failure because plan sponsors have the same lethargy about retirement savings as their employees.It is very easy to “set it and forget it” on both sides.
So what can retirement plan sponsors do to make sure they aren’t wasting their money and resources on a plan that doesn’t stand a chance? The most important step is to hire a financial advisor who has a lot of experience working in the retirement plan space and a recordkeeper whose focus is retirement plans versus something they do on the side,” said Kathleen Connelly, executive vice president of client service at Ascensus in Pennsylvania.
“The complexity of the regulatory environment and the number of things advisors, employers and recordkeepers need to keep an eye on…that list is getting longer, not shorter,” she said.
By working with people who are really focused on this as part of their practice and is a significant amount of their practice, plans will see stronger expertise, stronger control and more benchmarking taking place, she said. The same goes for the recordkeeper. It is important to work with a recordkeeper that is financially sound and is investing in its systems, its people and keeping abreast of the regulatory/legal side of the equation, she added.
“I think sometimes it is kind of easy to be swayed by the sizzle of the participant website, technology is important, but if you are doing that in lieu of training for the people who are running the business, it is not the best trade off,” Connelly said.
The next step is to make sure a retirement plan has the basics in place. Do they have an investment policy, a document that is up-to-date and compliant? Do they understand what it means and that it is reasonable to administer a plan using this document as a guide?
Other important questions are, do they have a loan policy? Are they administering the loan policy? Are they watching for loans that may be in default? Are they ensuring payrolls are being turned in a timely manner to the recordkeeper? Financial advisors are integral in helping retirement plan sponsors keep track of all these questions.
It is also imperative that the plan sponsor knows who owns the plan. In larger businesses, it is usually a benefits or 401(k) committee. Even at smaller companies, the role is assigned to someone, whether it is the owner of the company, a spouse or a human resources person.
Retirement plan sponsors also forget that retirement savings and health care benefits go hand-in-hand, particularly when speaking about retirement. Health care expenses are the largest expense most retirees will face in the future so it makes sense to have conversations with employees about both topics, said Shelby George, an ERISA attorney and practice leader for the Benefits Solutions Group at Manning & Napier Advisors.
“We are constantly surveying the economic environment. In the benefits space for plan sponsors, we’re thinking about what is happening in the current environment that is posing new threats and risks to plan sponsors and participants,” George said.
Today, the biggest challenges come from the escalation of health care costs and health care reform.
“Employers are focusing so much attention on managing their health care costs and complying with health care reform, often what is lost is why an employer is offering benefits in the first place,” she said.
Most people will need between $135,000 and $155,000 for health care expenses in retirement, George said. “That is the amount the average American in their 60s has saved in their retirement plan. That’s supposed to cover both health and other expenses. That alone is a clear example of how health and wealth have converged.”
Manning & Napier believes that the intermediaries hired by a plan -- whether they be financial advisors or health brokers – should take a coordinated approach coming up with retirement and health plan strategies. They first must devise short-term and long-term objectives of the plan and once consensus is reached on the objectives, it “becomes much easier and more effective to recommend plan design features that will achieve those objectives,” George said.
She is amazed that advisors will recommend retirement best practices to plan sponsors, such as automatic features, but they do so without even knowing what a plan sponsor’s objectives are.
Many plans skip setting objectives because there are multiple decision makers at the company who all have different priorities, she said. That’s why it is important to have a conversation about how to satisfy everyone’s needs. If an employer determines that employee satisfaction is the long-term goal and cost management is the short-term goal, the plan sponsor must find a way to allocate dollars between the health plan and retirement plan that will facilitate both objectives.
Lack of engagement, escalating costs and feeling that you aren’t getting what you want out of your benefit plans are all signs of retirement plan failure.
“Employers don’t even recognize the failure of plans because it is the way benefits have always been done,” George said. “It has always been reacting to one crisis or another. As an industry, we have a responsibility to raise awareness and encourage this conversation to more strategic decisions rather than reactive decisions.”
She added that, “we participants, by and large, are disengaged and the solution to that as a retirement industry is automatic features, but that doesn’t help a lot on the health side of it. We really need to be able to proactively engage employees on health as well as retirement.”
Once plan sponsors set the goals for their plan they must next figure out how they will track progress on those goals. Then it is time to move forward with plan design, Connelly said.
Particularly in the smaller end of the market, managing the plan is usually not somebody’s full-time job.
“If a company isn’t working with the right expert or they don’t have that roadmap that you use to check in multiple times a year, then it is really easy to get distracted by the rest of your job and let the pieces of this go by the wayside,” Connelly said.
“Let’s face it, running a 401(k) plan can be complex. Understand what your documents says, make sure you are adhering to that document. If you are not spending the time to make the right choices up front, you could go off on the wrong path and find yourself in trouble a couple of years from now.”
Retirement plan sponsors also need to have a basic understanding about how plan fees work. They should know what their fees are buying them and what plan participants get in return.
At a minimum, retirement plan sponsors should sit down once a year to review fund lineup and how the plan is doing compared to other companies of the same size and in the same industry, Connelly said. Review the company’s communications strategy as well.
“It isn’t just having the right lineup,” she said. It is important to have the right options but it is most important to make sure participants are taking advantage of those options. Companies do a disservice to employees when they put in place qualified default investment alternatives that have the opt-in deferral rate at less than 3 percent and no auto escalation policy in place.
“Unfortunately, too often, people don’t see that as a red flag, but that’s when the fireworks should be going off,” Connelly said. “All they are going to do is lull participants into a false sense of security.”
Retirement plan sponsors who don’t have any guidance, like a plan roadmap, or they look at what they are paying in fees and don’t think they are getting value for it, need to seek the help of a retirement advisor.
“Don’t put off making the decisions you need to,” Connelly said.