1. Workforce risk for sponsors.
Employees who aren’t sufficiently prepared for retirement will be forced to keep working.
According to the report, about half of those age 50 and older plan to continue to work past typical retirement age.
Doing so because they have to, not because they want to, due to inadequate financial preparation, can create the risk of a disengaged workforce and contribute to blocked career paths.
Targeted analytics can help employers identify problems among individuals or groups who are not adequately prepared, and also help them create a strategy to help.
9 defined contribution plan risks
Not only do DC plans bring new risks to would-be retirees — and to plan sponsors as well — the old risks haven’t gone away, but have actually grown.
According to a report from Willis Towers Watson, the risks embodied in the shared responsibility for retirement require both sponsors and employees to stay on top of the situation.
The slides that follow show 9 key DC plan risks, as well as some of the actions that sponsors and participants can take to help mitigate them.
9. Longevity risk for participants.
While life expectancy has climbed, employees haven’t taken that into account as they plan and save for retirement.
As a result, the assets they put away in DC plans may not last out the years they spend out of the workforce.
Although annuities can be expensive and confusing, as well as opaque, participants should give thought to a means of providing lifelong income—and sponsors should carry out due diligence on available products.
Each might want to consider combining annuities, changes in account drawdown tactics and Social Security claiming strategies for a multifaceted approach.
8. Tax risk for participants.
This is a strategic risk, since it involves potentially lost savings from participants not taking advantage of Roth 401(k), IRA accounts or health savings accounts (HSAs).
Not only do participants need to be better educated on the advantages of such accounts, says the report, “committees should consider adopting default options into Roth structures or promoting the use of HSAs to cover medical expenses or provide income during retirement.”
7. Savings risk for participants.
Workers just don’t know enough about how much to save to see them safely through retirement.
They also often must sacrifice retirement savings in order to meet other financial obligations.
Automatic features, such as auto-reenrollment, auto-escalation and personalized employee communications, can help, as well as plan modifications aimed at employee well-being that help them pay down debt or changing the configuration of the employer contribution.
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6. Investment risk to participants.
Not only do few employees know enough about investing to make sound decisions about plan choices, the volatility of underlying accounts—usually a mix of stocks, bonds and cash—needs to be mitigated with a more diversified mix.
In addition, committees should reevaluate Qualified Default Investment Alternatives, as well as alternative asset classes.
5. Compliance risk for sponsors.
A complex regulatory environment doesn’t make it easy for sponsors to keep up, despite the fact that it also represents increased fiduciary exposure.
Outsourcing isn’t always the answer, since there can be unintended consequences if the firms doing the outsourced work have inadequate safeguards.
One-time and ongoing reviews by compliance experts can help with this.
4. Distraction risk for sponsors.
Says the report, “Committees must evaluate their priorities and how they spend their time rather than simply taking on more responsibilities. The average committee member can dedicate only about 5 percent of his or her time to plan management issues.”
And that’s just not enough.
The report suggests that sponsors “adopt one of two strategies to allow their committees to refocus their efforts on improving retirement outcomes: either delegate investment decisions to an internal subcommittee or delegate them to an outsourced chief investment officer.”
3. Talent risk for sponsors.
If a DC plan doesn’t line up with a company’s Total Rewards strategy, it can be a turnoff to prospective (and current) employees.
In a tight job market, the plan has to hold up its end as a recruiting and retention tool.
Regular plan benchmarking can help ensure that the plan evolves to fit current and future needs.
2. Litigation risk for sponsors.
Investment offerings, plan-related participant fees and company stock can all leave a plan sponsor open to litigation if the plan hasn’t kept up with investment governance structures.
Sponsors and committees need to stay on top of internal governance policies for evaluating investment lineups, reviewing fees and executing best practices to document their decisions—as well as the use of outside ERISA consultants and attorneys to keep up with current and evolving regulations.
Advertisement
1. Workforce risk for sponsors.
Employees who aren’t sufficiently prepared for retirement will be forced to keep working.
According to the report, about half of those age 50 and older plan to continue to work past typical retirement age.
Doing so because they have to, not because they want to, due to inadequate financial preparation, can create the risk of a disengaged workforce and contribute to blocked career paths.
Targeted analytics can help employers identify problems among individuals or groups who are not adequately prepared, and also help them create a strategy to help.
9 defined contribution plan risks
Not only do DC plans bring new risks to would-be retirees — and to plan sponsors as well — the old risks haven’t gone away, but have actually grown.
According to a report from Willis Towers Watson, the risks embodied in the shared responsibility for retirement require both sponsors and employees to stay on top of the situation.
The slides that follow show 9 key DC plan risks, as well as some of the actions that sponsors and participants can take to help mitigate them.
9. Longevity risk for participants.
While life expectancy has climbed, employees haven’t taken that into account as they plan and save for retirement.
As a result, the assets they put away in DC plans may not last out the years they spend out of the workforce.
Although annuities can be expensive and confusing, as well as opaque, participants should give thought to a means of providing lifelong income—and sponsors should carry out due diligence on available products.
Each might want to consider combining annuities, changes in account drawdown tactics and Social Security claiming strategies for a multifaceted approach.
8. Tax risk for participants.
This is a strategic risk, since it involves potentially lost savings from participants not taking advantage of Roth 401(k), IRA accounts or health savings accounts (HSAs).
Not only do participants need to be better educated on the advantages of such accounts, says the report, “committees should consider adopting default options into Roth structures or promoting the use of HSAs to cover medical expenses or provide income during retirement.”
7. Savings risk for participants.
Workers just don’t know enough about how much to save to see them safely through retirement.
They also often must sacrifice retirement savings in order to meet other financial obligations.
Automatic features, such as auto-reenrollment, auto-escalation and personalized employee communications, can help, as well as plan modifications aimed at employee well-being that help them pay down debt or changing the configuration of the employer contribution.
Advertisement
6. Investment risk to participants.
Not only do few employees know enough about investing to make sound decisions about plan choices, the volatility of underlying accounts—usually a mix of stocks, bonds and cash—needs to be mitigated with a more diversified mix.
In addition, committees should reevaluate Qualified Default Investment Alternatives, as well as alternative asset classes.
5. Compliance risk for sponsors.
A complex regulatory environment doesn’t make it easy for sponsors to keep up, despite the fact that it also represents increased fiduciary exposure.
Outsourcing isn’t always the answer, since there can be unintended consequences if the firms doing the outsourced work have inadequate safeguards.
One-time and ongoing reviews by compliance experts can help with this.
4. Distraction risk for sponsors.
Says the report, “Committees must evaluate their priorities and how they spend their time rather than simply taking on more responsibilities. The average committee member can dedicate only about 5 percent of his or her time to plan management issues.”
And that’s just not enough.
The report suggests that sponsors “adopt one of two strategies to allow their committees to refocus their efforts on improving retirement outcomes: either delegate investment decisions to an internal subcommittee or delegate them to an outsourced chief investment officer.”
3. Talent risk for sponsors.
If a DC plan doesn’t line up with a company’s Total Rewards strategy, it can be a turnoff to prospective (and current) employees.
In a tight job market, the plan has to hold up its end as a recruiting and retention tool.
Regular plan benchmarking can help ensure that the plan evolves to fit current and future needs.
2. Litigation risk for sponsors.
Investment offerings, plan-related participant fees and company stock can all leave a plan sponsor open to litigation if the plan hasn’t kept up with investment governance structures.
Sponsors and committees need to stay on top of internal governance policies for evaluating investment lineups, reviewing fees and executing best practices to document their decisions—as well as the use of outside ERISA consultants and attorneys to keep up with current and evolving regulations.
Advertisement
1. Workforce risk for sponsors.
Employees who aren’t sufficiently prepared for retirement will be forced to keep working.
According to the report, about half of those age 50 and older plan to continue to work past typical retirement age.
Doing so because they have to, not because they want to, due to inadequate financial preparation, can create the risk of a disengaged workforce and contribute to blocked career paths.
Targeted analytics can help employers identify problems among individuals or groups who are not adequately prepared, and also help them create a strategy to help.
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
