DC East speakers tout importance of education, communication

Success in achieving defined contribution plan goals can rely as much on how plan executives and service providers communicate as to what investment options they offer, plan designs they prepare, and products and services they develop.

Whether its retirement income options, fees, target-date funds or plan-design changes, good ideas can be thwarted by inadequate education and communication — not only by sponsors to participants but also between sponsors and providers — said speakers at the annual Pensions & Investments East Coast Defined Contribution Conference held March 2-4 in Miami.

“People don't think like economists,” said Jeffrey Brown, the William G. Karnes Professor of Finance, at the University of Illinois at Urbana-Champaign, one of three keynote speakers. Mr. Brown used retirement income as an example of where some changes in wording might lead to changes in participant behavior.

“The retirement income conversation is narrowly framed about wealth accumulation,” said Mr. Brown, who also is the director of the Center for Business and Public Policy at the university. “It's not wrong; it's incomplete.”

Plan executives and public policymakers fall short in emphasizing how participants must convert their accumulated wealth into an adequate stream of income in retirement, including the use of annuities. “The real world demand for annuities is limited,” said Mr. Brown, who noted that he is a trustee of Teachers Insurance and Annuity Association.

There's plenty of blame to go around, he said. Most DC plans simply present participants with a snapshot of their account balance. “The average consumer doesn't know how to convert that into an income stream,” he said.

Most financial planning software ignores discussing the uncertainty of longevity risk, and rules governing required minimum distributions “are written from the perspective of tax policy — not behavior,” Mr. Brown said. Meanwhile, the Department of Labor discourages DC plans from providing annuity options because it lacks adequate safe-harbor rules to address plans' fiduciary concerns, he argued.

Phrasing plays a role as well. Mr. Brown said sponsors thinking about offering — or currently offering — retirement income options should use consumer-oriented terms rather than investment terms. Executives should review their plan documents to make sure they include discussions of longevity risk, and they should provide information in terms of monthly or annual income rather than only accumulated balances.

Communication also plays a role in determining how custom target-date funds are developed by sponsors and promoted to participants.At the Kroger Co., Cincinnati, plan executives conducted an extensive education campaign about a custom target-date fund, said Ed Waldvogel, vice president of pension investments, during a panel discussion on the opportunities and challenges of custom target-date funds.

Although custom target-date funds are more common now, they were “quite exotic” when Kroger offered this option in 2006, he said. Kroger executives pointed out the custom target-date fund was a strategy to improve diversification and simplify investments for participants.

The custom target-date fund, which is the qualified default investment alternative, now represents about $2 billion of the $6.2 billion in Kroger's 401(k) plan.

Mr. Waldvogel said the custom approach enables Kroger to incorporate 15 different investments within the target-date fund, including passively managed and actively managed funds, commodities and emerging markets equity. Kroger is willing to look at other possible components such as hedge funds and risk parity if providers “can get the liquidity, risks and fees under control,” he said.

The fund expenses range from 31 basis points to 44 basis points compared to off-the-shelf passively managed target-date funds with a fee range of 7 basis points to 18 basis points. “The fees need to be fair, and we have to communicate why the higher fee is worth it,” Mr. Waldvogel said.

Last year, the Kroger target-date fund had an 18.5% return. Over the past five years, the annualized return has been 14.9%. “We think it's worth it,” he said.

Communication is important not only for sponsors educating participants but also for sponsors seeking information from custom target-date fund providers, said another panelist, Glenn Dial, head of U.S. retirement, Allianz Global Investors.

“If you only want a glidepath customized, you can probably use an off-the-shelf target-date fund,” said Mr. Dial, referring to the many target-date fund variations on the market. “If you want more, then you should look at custom.”

Mr. Dial said DC plan executives should do an “extensive behavioral profile” of their participants. “Glidepath constructions are mathematics models,” he said. “They do not take into account behavior.”

He said companies make mistakes in developing a custom target-date fund by including investment components aimed at the most sophisticated investors. “You must keep in mind: Who are the target-date funds for,” he said. These options are best suited for the participants who want to delegate investments to professional management, he added.

The theme of improved communication also made an appearance in a keynote speech by David Levine, a principal at the Groom Law Group, Washington, about the political and regulatory environment.

He noted the Department of Labor is scheduled to issue a proposed regulation later this year on the definition and responsibilities of a fiduciary. Only now, the proposed rule is called the “conflict of interest rule for investment advice.”

“Great branding,” said Mr. Levine, adding the fiduciary definition rule is the department's top retirement plan priority this year. An earlier proposed rule was withdrawn in 2011 after strong objections from industry members.

Given the upcoming midterm elections and the possibility that Republicans could regain control of the U.S. Senate, Mr. Levine speculated the proposed rule would be issued after the elections. However, the longer the delay, the tougher it will be to enact a final rule given the lengthy regulatory review and public-comment process, he said. A cornerstone of any DOL rule on the role of a fiduciary will be the inclusion of individual retirement account advice as a fiduciary act, he predicted.

Fee disclosure still requires a heavy dose of communication even though federal regulations approved in 2012 have increased transparency. Several speakers exhorted DC plan executives to be vigilant in documenting and explaining what they do and how they do it.

During one panel discussion, audience members were polled on whether their plans have a fee policy statement. Although 25% said yes, 51% said their investment committees haven't considered such a statement. Ten percent said their committees didn't have one and didn't want one, and 15% responded that although their plans don't have a statement, their committees will develop one.

“I'm not terribly shocked,” said Amy Reynolds, a Richmond, Va.-based partner at Mercer LLC. Some investment committees have said they “don't want to create too many documents because they don't want to be painted into a corner,” she said. “It's in their best interests to document their decisions.”

Marla Kreindler, a Chicago-based partner at Morgan Lewis & Bockius LLP, said fee and expense policy statements can be flexible and should be updated yearly. “They don't have to be set in stone,” she said.

Ms. Kreindler recommended a lengthy fee-related to-do list for plan executives that includes making sure the plan's governing documents are consistent, being clear on what the named fiduciary has reviewed, determining what information has been disclosed to participants and taking care that the plan keeps good records on how decisions are made.

“If you don't have a good understanding of all fees, make a list and get a handle on them,” she said. That means reviewing administrative expenses at the plan level and participant level, understanding revenue sharing and indirect compensation, and reviewing investment option expenses such as advisory fees and stable value wrap fees.

When it comes to fees, “you're never done,” said Mary Nell Billings, the Memphis, Tenn.-based director of benefits, the Americas, for Hilton Worldwide. To be a good fiduciary, she added, DC plan executives should monitor actual fees against contracts, review services annually and look for ways to reduce administrative expenses.

As illustrated by P&I's annual Eddy Awards that were announced March 3, communication on the front lines of employee benefits takes various forms.

The use of games has been an effective tool for Staples Inc., Framingham, Mass., said Lisa Blasdale, senior benefits manager, during a seminar on “Embracing Technology in DC Plans.” She said Staples employees are motivated by friendly competition, so the company has used games to encourage greater 401(k) participation among younger workers, hourly employees and new employees who have postponed enrollment. The service provider is New York Life Retirement Plan Services.

Laura Gaynor, a vice president for Transamerica Retirement Solutions, said technological improvements for plan communications can be as simple as sending a link embedded in an e-mail so employees can take immediate action to enroll in a plan or make changes to their accounts.

Transamerica uses weather icons — such as “sunny” or “cloudy” — to help clients illustrate if participants are saving enough. “Just telling them you need $1 million (to retire) will cause them to shut down,” she said. “Communicate via imagery and tell them what to do to improve.”

Sometimes, imagery can be misleading, said Peter Ricchiuti, a finance professor at the Freeman School of Business, Tulane University, New Orleans. In the opening keynote of the P&I conference, Mr. Ricchiuti said steady gloom-and-doom coverage by the media — often about what he called financial myths — distorts the true picture, or at least the potential, of the economy.

“Uncertainty Brings Opportunity” was the title of his presentation, and he predicted that in the next 12 to 18 months the economy will be better than it is today.

Just remember, he told the audience, that in early 1990s, two-thirds of the country thought America was on the wrong track — and they missed out on strong economic and stock market gains. And, he added, 80% of Americans in 2000 thought the country was on the right track — just before the dot-com derailment.

And how about in 2010, “when nearly everyone thought the country was on the wrong track?” he asked the audience. Since then, the stock market has rallied and corporate profits “are phenomenal,” he said. Among the things that keep him up at night, Mr. Ricchiuti said, is a too-fast-growing economy, restrictions on free trade and restrictions on immigration.