Defined contribution executives slow in catching on

Surveys reveal continued stumbling over fees, role of fiduciaries

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Lori Lucas believes DC plan officials are still confused over fees, despite new disclosure rules.

Defined contribution executives are still struggling to understand key elements of plan management and design ranging from fees to revenue sharing to fiduciary duties.

Answers to questions from multiple surveys reveal a string of double-digit “don't-knows,” according to Pensions & Investments' review of surveys by different firms on many subjects.

When P&I first looked at knowledge of DC plan basics in early 2012, large numbers of plan executives were uncertain about such fundamental matters as investment policy statements, target-date fund glidepaths and plan costs. (Pensions & Investments, Jan. 23, 2012).

The follow-up examination shows improvement in some areas, but it also illustrates continued uncertainty regarding crucial issues that can affect participants' savings and the risk of litigation

“If you don't know what you don't know, how do you ask the right questions?” said Robert Benish, interim president and executive director of the Plan Sponsor Council of America, Chicago.

“Fee policy is the weak link in the amount of "don't knows,' ” said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates, referring to her firm's latest DC plan survey. “Despite fee disclosure regulations (which took effect last year), there's a lot of confusion about fees.”

In Callan's annual DC survey, published in January, 13.3% of plan executives said they didn't know their plan's method of accounting for company stock. There are two choices — share accounting or unitized accounting.

“This concerns us because this has been the subject of lawsuits — whether the accounting is prudent,” Ms. Lucas said. In addition, 11.1% didn't know if they have a written fee policy plan.

Another 23.5% of respondents didn't know what administration fees are charged for company stock. “For administrative fees, they (sponsors) should have that information at their fingertips because of the fee disclosure regulations last year,” Ms. Lucas said. ”Either they didn't receive the required disclosures from their providers or they didn't review them.”

The responses to this question are getting worse. In the previous year's survey, 13.3% of executives didn't know about the fees. In the prior year, 4.5% didn't know.

In an April 2012 survey by the Government Accountability Office, 48% of plan executives said they didn't know if their plans paid transaction costs, and 48% didn't know if their plans had revenue sharing arrangements.In the Callan survey, 17.8% of executives said they didn't know how their plans discuss revenue-sharing with participants. The survey also said 11.6% of those responding didn't know if their plans had ERISA expense reimbursement accounts, which allow plans to use excess revenue sharing funds for expenses such as plan communications and education.

“Sponsors should have spent most of last year focusing on this,” Ms. Lucas said.

Unsure about stable value

Stable value remains an uncertain area, with many plan executives not knowing the terms of their contracts and/or the consequences of their lack of knowledge.

“The market choices have gotten ahead of what sponsors understand,” said Cynthia Mallett, vice president of industry strategies and public policy for MetLife Inc., New York, whose company offers stable value contracts.

A MetLife survey, released in March,revealed that large percentages of plan executives didn't know if certain actions — ranging from a plan termination to a merger or acquisition — were considered employer-initiated events by their wrap providers.

Wrap contracts guarantee the book value - even if the fair market value is less - for actions taken by individual participants. “The (book value) guarantee does not apply to the employer or to the plan,” Ms. Mallett said.

Employer-initiated events can cause unanticipated, significant withdrawals. Wrap contracts contain provisions that permit payments other than book value for such events. Otherwise, stable value providers and wrap providers could suffer losses; remaining investors would be hurt, too.

The MetLife survey found that 18% of plan executives didn't know that a plan termination was an employer-sponsored event due to their wrap contracts. “It was surprising that it was so high,” Ms. Mallett said.

The MetLife survey found more dramatic examples of ignorance about employer-initiated events, including 26% for merger/acquisition/consolidation, 40% for a plant or business shutdown, 48% for bankruptcy, 44% for divestitures, 35% for layoffs and 44% for the addition or implementation of an early retirement program.

Even those who knew what constituted an employer-initiated event didn't always understand the consequences, Ms. Mallet added.

When asked about terminating contracts with wrap providers, 32% of respondents said they didn't know if there was a guaranteed book-value payout at termination, the same percentage as a similar MetLife survey in 2010. Some 36% didn't know if penalties are assessed when a wrap contract is terminated, vs. 42% who didn't know in 2010.

In another look at stable value, a survey by P&I and Rocaton Investment Advisors, Norwalk, Conn., found that that 39% of plan executives didn't know how much notice their stable value fund requires for the plan to withdraw at book value.

Basic issues

Several other surveys show that DC executives, when asked about certain elements of plan design or management, didn't understand some basic issues. When asked about the fiduciary status of third-party advisers and consultants, 27% of plan executives said they didn't know, according to a December survey by Verisight Inc., Walnut Creek, Calif., and McGladrey LLP, Chicago.

A survey by Mesirow Financial Holdings Inc., Chicago, last year also found that 34.4% of plan executives didn't know if their advisers or consultants acted as co-fiduciaries.

And when 403(b) executives were asked if their plans had investment policy statements, 28.3% said they didn't know, according to an October survey by the Plan Sponsor Council of America, Chicago, and Principal Financial Services Inc., Des Moines, Iowa.

This article originally appeared in the April 1, 2013 print issue as, "Executives slow in catching on".