Precision, flexibility vital for DC plans, say speakers at P&I conference

Defined contribution executives need to be both precise and flexible in the managing of their plans, according to fellow sponsors, consultants and providers who spoke at the annual Pensions & Investments West Coast Defined Contribution Conference, held Oct. 26-28 in San Diego.

Precision belongs to corporate governance because ambiguity can lead to confusion or lawsuits. Flexibility belongs to plan design and management because DC plans deal with diverse populations based on age, investment skills and retirement goals.

And no matter how precise or flexible DC plans are, they can expect heightened scrutiny by federal regulators — especially the Department of Labor and the Internal Revenue Service — during the next two years.

One key to successful corporate governance is for DC sponsors to have clearly written investment policy statements — and then to make sure they follow their own directions.

“I am amazed at the number of sponsors that I talk to that don't have an investment policy statement,” said John McCareins, practice leader for outsourced chief investment officer solutions at Northern Trust Corp., Chicago.

Speaking on a panel discussing corporate governance, he said: “It's not just about having an investment policy statement, but (also) about adhering to it. Good governance is about the process.”

Mr. McCareins said he supported the white-label approach for investment lineups — replacing brand-name mutual funds with generic names that better explain an investment strategy and better lend themselves to multimanager options.

White-label options provide greater diversification within an asset class, give sponsors greater agility in changing managers, streamline investment options and give participants greater confidence, he said.

Another corporate governance panelist, Ross Bremen, partner in the investment consulting firm NEPC LLC, Boston, said a recent survey by his firm of DC plan executives found that 64% believe that a majority of their participants won't have sufficient savings for retirement.

When NEPC asked the executives about the most important agenda item, plan fees were first and participant education was second by wide margins over eight other choices that included auto features, lifetime income offerings and customized target-date funds.

Mr. Bremen also polled members of the audience on their corporate governance views. When asked if they agreed with the statement that plan fiduciaries understand their roles and responsibilities, 51% disagreed. When asked about the statement that plan executives don't lose ERISA lawsuits for taking action, they lose for what they didn't do, 76% agreed.

DC plans can expect more attention from federal regulators during the final two years of Barack Obama's presidency, said David Levine, a principal at Groom Law Group, Washington, in the second-day keynote speech.

Regardless of the outcome of midterm elections, Mr. Levine said the Obama administration will continue regulating and enforcing. “The DOL will be visiting (sponsors) more,” he said. “The IRS will be visiting more.”

Even in the absence of new legislation, Mr. Levine predicted that regulators — especially the DOL — will continue to use amicus briefs and its own lawsuits to signal its interests on DC plan behavior and management. “Litigation yields guidance,” he said. “The legislative gap will be filled through regulation and enforcement.”

Mr. Levine referenced what he called a convergence between health care and retirement as a warning to sponsors about the competing demands for a finite amount of money — a theme also addressed by other speakers,

“The wild card in retirement is health care,” said Tami Cunningham, director of institutional retirement and benefit plan services at Bank of America Merrill Lynch, a panelist for a session called “The Outcome is Income.”

Fellow panelist Stephen E. Jenks added: “You cannot make any major decisions in retirement without taking into account an individual’s health care.” Mr. Jenks is head of marketing for Great-West Financial.

Mr. Jenks added that the “biggest driver” for a successful retirement is a participant's savings rate. “It is very difficult to investment your way out of a savings problem.”

A survey by his firm showed that participants saving 3% or less annually will only be able to replace 54% of their income in retirement. Those saving 4% to 6% annually can replace 73%. If they save 6% to 8% a year, the income replacement ratio rises to 87%. Saving 10% or more a year produces an income replacement ratio of 113%. Health care also played a role in a panel discussion of leakage — the practice of participants removing some of their retirement savings for loans, hardship withdrawals or cash-outs before their retirement.

Lisa Blasdale, senior benefits manager, Staples Inc., Framingham, Mass., said sponsors should beware of the potential impact on 401(k) plans of the growing use of health savings accounts, which enable individuals covered by high-deductible health plans to receive certain tax benefits for money saved for medical care. Staples has more than 10,000 HSA participants. The 401(k) plan had $1.37 billion in assets as of Dec. 31.

She said DC executives have to watch participant behavior in 401(k) plans when participants select HSAs. For example, when Staples introduced HSAs, there was an increase in loans and hardship withdrawal from the 401(k) plan.

In November, she said Staples will conduct a “financial wellness week” in which the company will explain retirement issues as well as HSA tax benefits and HSA investment opportunities.

In addition to being flexible in how they allocate funds for retirement and health care, DC plans also have to be flexible in how they communicate with diverse workforces with multiple needs.

There's no one-size-fits-all solution, said several speakers at a session on the impact of demographics, age and geography on plan participants.

A survey by the San Diego County Deferred Compensation Plan found that millennials (those born between 1978 and 1994) had lower average savings rates (5%) than baby boomers (1946 to 1964) at 9% and Generation X (1965-1977), at 6%. Millennials also had lower participation rates than the other group — 44% vs. 64% for baby boomers and 62% for Gen Xers.

“We don't know why,” said Maria Pe, chief deputy tax collector for San Diego County and administrator of the $1.1 billion deferred compensation program.

The county analyzed general characteristics of the various groups. For example, millennials prefer short, informal interactions in small groups over big meetings. They are tech savvy but prefer to talk in person for “important messages.”

Ms. Pe said the county will conduct a survey of employees on why they participate or don't participate — with a special emphasis on millennials.

Surveys by State Street Global Advisors show that Gen Xers are less confident about having saved enough for retirement than are baby boomers and millennials, said Fredrik Axsater, senior managing director and global head of defined contribution for SSgA, one of the panel speakers.

Despite the difference in ages, other research by SSgA found that each group — to varying degrees — preferred more information from multiple sources to help them save for retirement. The most useful source of retirement information was a combination of the broad category of online retirement planning information, advisers and financial publications. The least valuable source for each group was guidance from the government.

How you communicate can be as important — if not more so — than what you say, said Suzanne Shu, associate professor at the Anderson School of Management at the University of California at Los Angeles.

In the second-day closing keynote address, Ms. Shu offered a menu of examples — auto enrollment, insurance, investing, organ donation, restaurant choosing — to illustrate how differences in presenting choices can alter results.

In the 401(k) arena, she cited research by others showing how plans using an opt-out strategy — employees had to choose to decline — for auto enrollment improved participation rates vs. the opt-in approach.