DC West conference attendees hear of politics, simplicity

Politics and public policy permeated Pensions & Investments' West Coast Defined Contribution Conference, held in San Francisco Oct. 27-29.

Various speakers told the audience that retirees, plan participants and the defined contribution industry are affected by more than Congress. The world economy and the actions by central bankers in major markets affect domestic retirement investing, while U.S. regulators and the Supreme Court might have a bigger short-term influence on retirement than action or inaction by Congress.

Other speakers offered multiple rays of sunlight demonstrating how simplicity and a straightforward approach to such subjects as plan design and education and communication can yield desired results of greater participation and greater retirement savings.

Keynote speakers talking about world and domestic policy and politics served as bookends to the conference: Mohammed El-Erian, CEO and co-chief investment officer of Pacific Investment Management Co., opened the conference; Washington insider James Delaplane Jr., principal and head of ERISA and fiduciary services at Vanguard Group Inc., closed it.

Congressional dysfunction has created a narrowly focused silver lining for the retirement industry — little chance of comprehensive legislation affecting retirement plans, Mr. Delaplane said Oct. 29.

Low approval ratings and fighting within the Republican Party will lead Washington to be less ambitious in all of its agendas, he said. As a result, Mr. Delaplane said, the odds of any kind of comprehensive tax reform, are “extremely low.”

He said tax law changes related to retirement plans could occur in limited ways, if the measures could raise federal tax revenue.

Mr. Delaplane also said that as Congress' bipartisan budget-conference committee works toward the Dec. 13 deadline for a federal spending plan for the fiscal year that began Oct. 1, that panel could propose defined benefit plan funding relief for corporations to increase taxable corporate income, which would increase federal revenue. He said a premium increase for the Pension Benefit Guaranty Corp. could be possible for the same reason.

He expects the Labor Department's regulation on putting lifetime income illustration on benefit statements to be proposed next year. He added that while many in the industry want the illustration to be voluntary, he believes it will seek to make it mandatory.

Mr. Delaplane predicted the Labor Department will reintroduce its proposal to redo the definition of a fiduciary — now known as the conflicted-advice proposal — to come out next summer.

(The House approved legislation Oct. 29 that could significantly delay the Labor Department's proposed fiduciary rule. The measure has uncertain prospects in the Senate, and President Barack Obama already has threatened a veto. “It would derail important rule-makings underway,” the Office of Management and Budget said in a statement.)

Treasury Department and Internal Revenue Service initiatives are likely to focus on guidance regarding in-plan Roth conversions. The conversions were permitted under the law that kept the U.S. from going over the fiscal cliff this year, but have not been adopted by many plan sponsors because of the lack of regulatory guidance, Mr. Delaplane said.

In his keynote speech that opened the conference, Mr. El-Erian said the constant bickering in Congress over the federal budget and the debt ceiling is affecting the country's financial reputation. When he travels abroad, Mr. El-Erian said, people are mystified by Congress. “You are behaving in really strange ways” is a common reaction, he said Oct. 28.

U.S. politicians will need a “Sputnik moment” to jolt them into cooperation, said Mr. El-Erian, referring to the comprehensive bipartisan U.S. effort to build the space program following the Soviet Union's launch of the first satellite in 1957. But he fears such a moment would come as the result of a crisis.

Away from politics and on the front lines of plan management, simplicity was a dominant theme at the conference.

Julie Adamik, director of benefits planning and design for Petco Animal Supplies Inc., San Diego, regaled the audience with a presentation supporting her assertion that humor, eye-catching comments and simple phrases are important ingredients in improving education and communications.

(Petco won second place for ongoing education in P&I's 2013 Eddy Awards for its “Barking for Benefits” quarterly newsletter, which Ms. Adamik talked about during her conference presentation.)

“We didn't change what we communicated,” she added. “We changed how we communicated.” For example, Ms. Adamik switched to mobile apps from paper.

Ms. Adamik explained she had to appeal to three distinct groups: corporate officers; distribution center workers who are predominantly male, Hispanic and long-tenured; and store employees, who are younger and for whom there is higher turnover.

Simplicity in plan design was emphasized at several conference sessions, including one on re-enrollment. Consultants and plan executives said this practice helps plans and participants refocus their retirement strategies, especially when combined with qualified default investment alternatives and/or investment lineup overhauls.

An interactive poll of the audience showed 19% have conducted re-enrollment, 22% are planning to do so, 35% are considering it but have reservations and 24% aren't interested.

“Two years ago, maybe 10% would have been interested,” said Toni Brown, the San Francisco-based senior defined contribution specialist at Capital Group. “The lack of pushback by participants shows they appreciate it.”

Plan executives who engineered re-enrollments counseled their peers to educate both their investment committees and their participants about re-enrollment.

“Don't live in fear,” said Melanie Higgins, global retirement director for Bemis Co. Inc., Neenah, Wis., whose investment committee initially was reluctant. “The risk is minimal. The reward is high.”

The Bemis re-enrollment was accompanied by a series of investment menu changes, including the reduction of core options to seven from 10, moving out of revenue-sharing funds and dropping stable value. Instead of a target-date family with six funds offering retirement dates at 10-year intervals, Bemis switched to a family of 10 target-date funds using five-year increments for retirement dates.

In one of Bemis' 401(k) plans, the re-enrollment resulted in 76% of participants enrolled in the target-date series, which is the QDIA. The target-date allocation grew to 53.5% of plan assets after re-enrollment in June vs. 13.6% in the month before re-enrollment. In another Bemis plan, 86% enrolled in the target-date funds. The target-date assets surged to 69.8% of total assets post re-enrollment vs. 25.4% before re-enrollment. “We felt confident in the results,” she said.

At the University of California Retirement System, there was some apprehension about how the approximately 43,000 participants in its three DC plans would react to re-enrollment, said William Ryan, director of client relation services for the University of California Regents' Office of the Treasurer, Oakland, Calif. “There wasn't any pushback,” said Mr. Ryan of the re-enrollment that took effect in June. “Our fear was of the unknown.”

The re-enrollment was part of a comprehensive effort to cut fees, reduce investment duplication and simplify the investment menu, he said. So far, the university has reduced the number of investment options to 87 from 214.

Simplicity also was a part of a session on investment options, where Mark Hamilton, chief investment officer for asset allocation at OFI Global Asset Management, New York, pointed out that more options don't automatically mean better choices. “If you offer more choices of one asset class, participants will think you need to invest in more of that class to believe they are diversified,” he said.

Making a plan design simpler doesn't necessarily involve significant cuts in options, said Bryan Dunnivant, investment officer for global treasury, pension and benefits at Eli Lilly & Co., Indianapolis. His company recently trimmed its menu to 10 from 11, but that restructuring included reducing the number of active domestic large-cap stock options, dropping two international equity options and removing two domestic equity index funds. Additions included one active U.S. equity option and one active international equity option run in a managers-of-managers format, two passive equity options and a real assets option.

Improving plan design also was cited by Larry Zimpleman, chairman, president and CEO of Principal Financial Group, Des Moines, Iowa, as crucial to improving retirement savings. Auto-enrollment, auto-escalation, higher auto-enrollment deferral rates and the use of lifecycle funds were among the design features mentioned by Mr. Zimpleman as he received the annual Lillywhite Award sponsored by the Employee Benefit Research Institute.

Sponsors and providers have taken “a very passive approach” to offering retirement education, resulting in too many employees not participating in retirement plans or not contributing sufficient amounts to prepare for retirement, said Mr. Zimpleman. “In too many situations we're watching poor decisions being made, and we're not doing enough,” he said.

The Lillywhite Award honors a person “whose outstanding service economic security,” according to EBRI. At the conference, Dallas Salisbury, president enhances Americans' and CEO of EBRI, Washington, praised Mr. Zimpleman as a “long-standing champion of savings and financial literacy.”

In a keynote speech to the conference, Mr. Salisbury turned to the dictionary to illustrate the definition of “crisis,” concluding the retirement system didn't meet the criteria.

Some public pension systems, like Illinois', are in a crisis, he said. Some private and multiemployer plans are in crisis, and, of course, some individuals and families are in a crisis. Overall, however, the system isn't in crisis, he said.

Mr. Salisbury disputed the idea that defined benefit pension plans offer better retirement income outcomes than do defined contribution plans. “Choices can be bad or good in any type of retirement plan,” he said. “One can have bad outcomes from any system. Implying the old system was nirvana and now we have a crisis is not supported by the numbers …. Things are in fact statistically getting better.”