DC West attendees told to be more involved in plan design

J. Mark Iwry

Defined contribution plan executives were told they must take a greater role in plan design, expansion and maintenance without relying on or waiting for the government.

That do-it-yourself theme was reinforced by a range of speakers — including a top U.S. regulator — at Pensions & Investments' West Coast Defined Contribution Conference, held Nov. 4-6 in San Francisco.

“The role of government is to listen, learn and facilitate,” J. Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, said in a keynote address. He then offered a to-do list of plan-design improvements that he said didn't require additional government regulation and wouldn't increase plans' risks or costs.

At the top of his list was implementing auto enrollment for all participants — not just new employees. A poll of conference attendees showed the biggest reason for failing to auto-enroll all employees was the fear that participants would react adversely. The second biggest reason was corporate inertia.

Mr. Iwry also recommended that plans raise the initial default employee contribution rate to 5% or 6% of pay from the traditional 3%. Surveys and anecdotal reports indicate raising the default rate to these levels won't cause a significant percentage of participants to opt out, he said.

Another idea to improve participant savings is to stretch the corporate match — for example, offering a match of 50 cents on the dollar up to 6% of annual pay rather than a dollar-for-dollar match up to 3%, he said. The corporate cost is the same, and the opportunity to encourage greater participant deferral rates is enhanced, he said.

Mr. Iwry also recommended plans increase the percentage of employee contributions that is automatically increased each year, even if they push the total deferral past the 10% maximum safe harbor for discrimination testing.

Of course, DC executives need some government guidance. Mr. Iwry told conference attendees he expects the Treasury Department to issue final rules in the next few months addressing two retirement income issues affecting defined contribution plans — making it easier for plans to offer the option of partial annuities and to offer the option of longevity annuities, also known as longevity insurance. The proposed rules were issued in February and were subject to public comment.

Mr. Iwry also said the Treasury Department is working on guidance to simplify the process by which 401(k) plans can accept rollovers from participants' IRAs or retirement accounts from other plans.

In the keynote speech opening the second day of the conference, Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, Washington, said the role of government is necessary in protecting Social Security.

“Don't take away the base (because) it's essential to allowing people to retire,” he said. Social Security is the “most important and essential retirement income program in the nation when judged quantitatively.”

Mr. Salisbury exhorted attendees to use best practices, such as auto enrollment, which he called a “critical factor” in improving participants' savings. Like Mr. Iwry, he recommended companies permit higher default percentages and add auto escalation.

And when plan executives consider changes in plans or communication to participants, they should incorporate all financial information — including defined benefit plans, individual retirement accounts, health-care costs and long-term insurance issues, Mr. Salisbury said.

President Barack Obama's re-election likely will mean the Department of Labor's fiduciary rule is resubmitted, said James Delaplane Jr., Washington-based principal of government relations at the Vanguard Group. Mr. Delaplane, the final keynoter, spoke on Election Day.

Also, he said an Obama Labor Department, rather than expanding the use of electronic delivery to benefit plan disclosures, “may even” backslide on the issue of allowing electronic delivery of benefit statements to plan participants. Regardless of the election outcome, Mr. Delaplane said he sees “no appetite in Congress for mandates” of any kind, even for an automatic individual retirement account, and predicted activity on those kinds of issues are likely to come at the state level.

He also speculated that the need for a grand bargain to address the coming fiscal cliff is likely to include entitlement reform that will affect Social Security and Medicare.

He said raising the Medicare eligibility age from 65 is “quite likely to happen in the coming year,” noting that such a change would “affect employee retirement timing and will affect adequacy calculations.”

The tax preference for retirement savings also could be reduced. “It is not a question of whether retirement savings will be hit, but a question of when and how,” he said.

Taking a comprehensive view of retirement — both in plan design and in participant education — was reinforced throughout the conference.

For example, Dimitra Hannon, director of well-being and retirement strategy at Boeing Co., Chicago, described her plan's efforts as encompassing far more than investment information, as it provides education and counseling for subjects ranging from family budgeting to health care. In addition to helping individuals and their families, she said, this strategy helps the company by reducing absenteeism and improving productivity.

The issue of going beyond retirement savings and working with employees on financial well-being also came up in a panel on measuring the success of a DC plan.

Several executives said that in order to be successful, they need to consider financial well-being today and how it will affect the level of income a plan participant will have in retirement. That means they have expanded the scope of DC plans' work beyond retirement to taking a holistic approach in working with their employees around how to manage money.

Phillip White, director of Racker Rewards at San Antonio-based cloud-computing company Rackspace Holdings, agreed that it is important to help an employee look at overall financial wellness in connection with retirement issues.

To that end, Mr. White described how Rackspace did a financial wellness assessment with all its employees to “ensure people have the flexibility they need and savings” so they don't have to take loans from their 401(k) when emergencies arise. He said after using both qualitative and quantitative assessments — asking both about employees' levels of fiscal distress and about their maintenance of an emergency fund outside the 401(k) plan — Rackspace officials saw the opt-out rate from auto enrollment in their plan drop to a range of 15% to 20% from a prior level of 30% to 40%. In addition to the assessments, the company has added an employer match to its program.

Linda Robertson, a senior financial planner with Financial Finesse, El Segundo, Calif., echoed the plan executives' experience, saying her company has found a strong correlation between overall financial wellness and preparation for retirement.

Steve Deschenes, a senior manager for defined contribution plans at Capital Group Institutional Investment Services, Los Angeles, said employers should encourage employees to look at retirement readiness overall.

He laid out four measures employers can consider when evaluating such readiness: individual data on the employee's salary and age; the total assets in the existing and all past plans; the rate at which an employee is saving in the plan; and the projected growth from their investment strategy. To complete the process, he suggested “translating that information into a monthly income measure as a form of salary replacement.”

In a panel discussion on DC plan investment strategy, Jerry Webman, senior investment officer and chief economist of OppenheimerFunds Inc., New York, said participants should think more globally. “There are great fixed-income opportunities around the world,” said Mr. Webman.

Christopher Orndorff, portfolio manager for Western Asset Management Co., Los Angeles, also sounded the global investing theme. Look for fast-growing countries with “superior demographics” — a younger population, he said, referring to emerging markets in Latin America and Asia.

Darrell Spence, senior vice president of Capital Strategy Research Inc., Los Angeles,offered some general advice for both participants and executives. “Focus less on squeezing every dollar out of the market,” he said. “Concentrate on the objectives you want to accomplish and how you want to get there.”

One way to set objectives is the investment policy statement, but speakers on a panel on litigation warned about statements that are too vague or too detailed.

“Don't throw everything into the investment policy statement,” said Lori Lucas, executive vice president and defined contribution practice leader for Callan Associates, San Francisco. Such a statement should be kept up to date, establish clear guidelines for action and provide a road map for long-term decisions, she said.

Azeez Hayne, a Philadelphia-based partner in the labor and employment practice of Morgan, Lewis & Bockius, reminded executives to make sure their plan documents and investment policy statement use identical wording. “You don't want the plan and the investment policy statement saying something different and then have to litigate what is controlling,” he said.

Several members of the panel said the memory still lingers among plan executives of the ill-fated attempt earlier this year by the Labor Department to increase companies' fiduciary responsibilities and monitoring requirements of self-directed brokerage accounts.

Conference attendees weren't cautious in their applause for Nobel Laureate William F. Sharpe when he received the annual Lillywhite Award sponsored by EBRI.

“I implore you to try to avoid magical thinking and try to employ good economics,” Mr. Sharpe said in his acceptance speech for the EBRI award offered annually to honor people for lifetime contributions to economic security.

Mr. Sharpe, who won the 1990 Nobel Prize in Economic Sciences, is the STANCO 25 professor of finance, emeritus, at Stanford University Graduate School of Business.