Mercer, the global consulting firm, advises corporate sponsors of 401(k)s and other defined contribution plans to focus on more than just retirement in 2017.
“Change is the only constant in today’s market,” says Mercer partner Liana Magner in a statement. “DC plans need to evolve with changes in legislation, regulations, industry trends and changing needs of individuals. What may have been ideal a few years ago many not be as ideal today.”
With that in mind, Mercer has published a report “Top Priorities for DC Plan Sponsors Moving into 2017” that includes but goes beyond the impact of the Department of Labor fiduciary rule, which could potentially change or be repealed under President-elect Donald Trump.
–Focus on more than just retirement. Asset allocation, auto-enrollment and other features related to retirement are no longer good enough, according to Mercer.
“Companies also need to acknowledge other financial needs of employees and offer guidance and goals for employees to most effectively manage their broader financial situation.”
–Consider including assistance with student loan repayments. Forty million Americans currently owe $1.3 trillion in student loan debt, and many are struggling to repay those loans, notes Mercer. For many, repaying student loans is more important than saving for retirement, but that could cause employees to miss out on an employer’s matching contributions to their 401(k) plan.
Mercer notes that although there could be complications integrating employee student loan repayments within a 401(k) plan design, it can be done, and it could make plans more attractive to employees.
–Study the design of your matching program. Mercer recommends that plan sponsors study the behavior of plan participants to assess if their plan’s design influences employees choices for the better.
For example, does matching 4% of participants’ contributions suggest that 4% is enough to save for retirement?
Plan sponsors should consider how a plan’s design can “be more effectively structured to influence the preferred behavior” of participants.
Review managed account programs. Plan sponsors should review when it last reviewed their managed account provider and whether, after reviewing the program, that provider remains the sponsor’s first choice.
In light of the new DOL fiduciary rule, “plan sponsors should fully understand exactly what fiduciary role the managed account provider will be accepting,” writes Mercer.
Plan sponsors need to understand potential conflicts of interest and the type of advice the managed account provider will dispense, especially related to distributions.
–Reconsider target date funds. The DOL has issued guidance highlighting how defined contribution plan sponsors need to ensure that target date funds remain appropriate for plan participants, according to Mercer.
With that in mind, plan sponsors should determine if the TDFs in their plan align with employees’ ages and likely retirement dates and the quality of the offering. “A lot has changed in the past five years. What may have been ‘best in class’ may not be so today,” writes Mercer.
(Related on ThinkAdvisor: MFS Cuts Fees on Target Date Funds)
Target date funds have also been the subjects of class-action lawsuits against the sponsors of 401(k) plans at Wells Fargo and Safeway.
(Related on ThinkAdvisor: Target-Date Funds Are ‘Yesterday’s Technology,’ Says Stadion’s Doherty)
–Evaluate plan participants and nonparticipants regularly. Is a sponsor’s plan design relevant to the particular base?
Mercer notes that plan sponsors need to understand the behavior, needs and priorities of plan participants and nonparticipants in order to know if the plan is designed appropriately.
For example, it suggests that sponsors study how participants are using existing investment options and assess their retirement preparedness. Relying on a recordkeeper, it notes, will not provide information about nonparticipants, which is also crucial to understand in order to get them to enroll.
–Delegate fiduciary responsibility. Which responsibilities should a plan sponsor keep and which would be better served by a third party?
–Protect against cyber risks. “The question is not if a DC plan sponsor will have a cyberattack, rather it is a question of when,” says Mercer. The consulting firm recommends that plan sponsors have a strategy to address cybersecurity and to mitigate the impact of any attack.
–Consider (reconsider) retirement income options. Mercer notes that retirement options are changing. An increasing number of DC plan sponsors are now open to the idea of retirees taking partial withdrawals from their 401(k) plan and the Retirement Enhancement and Savings Act of 2016 could presage more changes.
The legislation, which is pending before Congress, allows unrelated employers to join pooled employer plans (PEPs), replacing the more limited multiple-employer 401(k) options in place today and modifies other aspects of defined contribution plans, including hardship rules.
Monitor the impact of the DOL fiduciary rule. As things stand currently, the DOL rule will begin to take effect April 10, but it could be delayed or repealed under the Trump administration. Mercer advises plan sponsors to monitor whether the rule will roll out as anticipated as well as how a plan’s vendors, including recordkeepers, are changing their services to accommodate the rule.
“DC plan sponsors need to confirm if the services they selected will actually be the ones being provided in the future.”
Focus on fees. Mercer notes that the “focus on fees alone is inappropriate. The key is whether additional expected benefits outweigh the additional fees incurred.”
Mercer doesn’t mention this, but most class-action suits against 401(k) plan sponsors allege excessive plan fees.
— Related on ThinkAdvisor:
- Worry Over 401(k) Fees Rises as Lawsuits Increase
- MFS Cuts Fees on Target Date Funds
- Target-Date Funds Are ‘Yesterday’s Technology,’ Says Stadion’s Doherty