For employers sponsoring defined contribution retirement plans for employees, the beginning of a new year might be a good time to reevaluate those plans. Many retirement plans were instated years ago and haven’t been looked at since, meaning that employers and employees alike might not be getting the full benefit of such plans.
Excessive and Hidden Fees
Within the past year, numerous defined contribution (DC) retirement plans have come under fire for excessive investment management fees. Employers hire investment managers to ensure the plan’s investment options have the highest return for participants, as well as to offer a diverse group of funds from which the participants can choose. Sometimes, these investment managers can steer plan participants into particular investment fund options. Essentially, the more investment fund options the employer allows, the higher some of the fees associated with these funds can be. Such fees often are used for compensating the investment managers appointed to these plans. The Department of Labor has tried to eliminate these higher fees by adopting a “conflict of interest final rule” to be implemented April 10, 2017. This final rule will help protect employees participating in DC retirement plans by ensuring that “firms and advisors will be required to make prudent investment recommendations without regard to their own interest, or the interests of those other than the customer, charge only reasonable compensation, and make no misrepresentations to their customers regarding recommended investments.”
Another issue with retirement plan fees is that these fees can be “hidden” among certain investment fund options. For example, suppose that Employee A invests in Option 1 and Employee B invests in Option 2. Option 1 has a fee higher than Option 2, but Option 1 gives a fee credit to the entire plan at the end of the year, which is then allocated to the accounts of both Employee A and Employee B. Employee A’s fee essentially has reduced Employee B’s fee. Multiple lawsuits have been filed due to these excessive, and sometimes hidden, fees, which are seen as unfair to those paying the higher fees. Employers should take a closer look at plan fee agreements to ensure their plan’s fees are fair for participants.
Millennials and Retirement
Millennials currently make up the largest generation in the U.S. workforce. However, countless millennials don’t save enough for retirement. According to a survey from Natixis Global Asset Management (Natixis), only 55% of millennials believe they can count on Social Security benefits when they retire. This lack of confidence in the Social Security program is a major reason millennials are turning to employer-sponsored retirement programs. The Natixis survey also showed that 82% of millennials believe that employers should be required to offer some kind of retirement plan to their employees. For a number of millennials, saving money is a great difficulty. Exorbitant student loan debt is a major obstacle for some, but others cite lack of education and guidance around retirement plans as a deterrent. Employers should examine the demographics of their workforce and try to offer educational guidance for workers at every stage of employment, from newly enrolled to nearing retirement. This may help all employees create a clearer financial picture of their future.
As more and more employees participate in these DC retirement plans, it might be advantageous for employers to refer to the plan document to review the plan’s original purpose. Questions to ask might include:
- Were they trying to gain greater employee participation in the program?
- Did they hope to incur the least expensive retirement program?
- Were they trying to be competitive with other employer retirement programs by offering the most diverse investment options?
- Did they consider the retirement program from the perspective of their employees?
To understand where focus should be directed while evaluating a retirement plan, these are important questions to ask. Employers should review their program’s rules surrounding automatic enrollment of employees to assess the impact of this provision on their program.
In addition, employers should review fund options to determine if they are diverse enough for their employees, as well as review the matching contribution their retirement program offers to determine if they can increase it by 1-2%. Employees are more likely to participate if they see their money going further. Increases in the stock market play a large role in this, but employers have multiple ways to entice participation without relying on market performance.
The Role of Third-Party Administrators
Finally, employers should ensure they are getting everything they need from their third-party administrator (TPA). Employers should retain all TPA agreements and periodically review them to determine if they lack services the TPA should be providing. For example, many TPAs should provide certain reports, such as quarterly plan sponsor reports, as well as the annual Summary Plan Description (SPD) for distribution to all retirement program participants. Frequently, a TPA fails to provide an employer with quarterly reports or an SPD, so the employer produces its own quarterly reports and annual documents to distribute.
Additionally, employers should evaluate whether their retirement program fees are fair. Almost all TPA agreements include a fee schedule outlining what the employer is required to pay regarding general recordkeeping services and what the employees are required to pay regarding individual participant-directed transactions. Employers should not be afraid to “shop around” for different administrators and record-keepers to compare services and associated costs. Employers also should be sure they have a point of contact to approach when they or their employees have questions regarding the retirement program. Most TPAs have an account manager assigned to a specific retirement program. Employers must ensure they receive support from this account manager on a regular basis, and not just at the end of the year during an audit.
As the seasons change, so will the needs of employers and employees. Ringing in a new year almost always signals a fresh start, and employers should take note. Employees will be reevaluating their individual portfolios, and employers should be ahead of the game to offer the best retirement program possible.
If you have any questions about defined contribution plans, or would like to request a speaker on this topic for your organization or event, contact one of our executives below at (800) 270-9629.